U.S. Stocks Join Global Equities Slump on Dubai’s Debt Crisis

VNStockNews.com - U.S. stocks fell, joining a global slump that began when American exchanges were closed yesterday, as Dubai’s attempt to reschedule debt rattled investors and drove shares of banks lower.

Bank of America Corp. and JPMorgan Chase & Co. declined a day after financial institutions led the MSCI World Index’s retreat during the U.S. Thanksgiving holiday. Exxon Mobil Corp. lost 2.1 percent as oil tumbled 2.7 percent to a six-week low. U.S. stocks pared declines after Richard Bove, Rochdale Securities LLC’s bank analyst, said American lenders have “minimal” exposure to Dubai.

The Standard & Poor’s 500 Index lost 1.7 percent to 1,091.49 at the 1 p.m. close in New York after retreating as much as 2.4 percent in the first 15 minutes of trading. The Dow Jones Industrial Average dropped 154.48 points, or 1.5 percent, to 10,309.92. The MSCI World Index decreased 1 percent, giving it a two-day slump of 2.3 percent. U.S. stock exchanges closed three hours early, and 4.53 billion shares traded, the least since Dec. 26, 2008.

“It’s reminiscent of the scare we had last year, which was extremely frightening,” said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. “A news item like Dubai just reminds people that we’re not out of the woods completely.”

Europe’s Dow Jones Stoxx 600 Index fell the most since April yesterday on concern Dubai’s proposal to delay debt payments may trigger the biggest sovereign default since Argentina in 2001.

Asia Pacific

The MSCI Asia Pacific Index posted the steepest loss since March today. The S&P 500 had surged 64 percent from a 12-year low on March 9 amid signs the global economy is improving, while oil and gold jumped 130 percent and 58 percent, respectively, from their lows of the past year.

Dubai World, with $59 billion of liabilities, will ask all creditors for a “standstill” agreement as it negotiates to extend maturities, Dubai’s Department of Finance said on Nov. 25. Moody’s Investors Service said it would consider the plan a default should bondholders be forced to accept the terms. Dubai borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub.

Bank of America, the biggest U.S. lender by assets, fell 3 percent to $15.47. JPMorgan, the second-largest, lost 2 percent to $41.33. Banks in the MSCI World Index fell 2.4 percent yesterday, leading the index’s 1.4 percent retreat.

XLF Drops

The Financial Select Sector SPDR Fund, or XLF as the exchange-traded fund tracking U.S. banks, brokerages and insurers is known to traders, fell 2.7 percent to $14.28 today, paring an intraday drop of as much as 3.2 percent. Citigroup Inc. retreated 2.6 percent to $4.06. Wells Fargo & Co. lost 2.5 percent to $27.14. Goldman Sachs Group Inc. dropped 2.8 percent to $164.16.

Michael Evans, Goldman Sachs’s Hong Kong-based vice chairman and the company’s highest-paid executive officer last year, sold $12 million of stock this week. Evans sold 70,000 shares at prices ranging from $170.98 to $173.47 on Nov. 23 and Nov. 24, according to a document filed with the U.S. Securities and Exchange Commission. Evans retained 714,953 shares worth about $121 million.

Dubai World’s lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation. Their shares retreated yesterday when U.S. exchanges were closed.

‘Important Test’

“Monday will be a very important test to see if the whole concept of counterparty risk is opening up in a larger sense again, or is this just an isolated element that really sort of stays there,” said Liam Dalton, president of Axiom Capital Management Inc., which manages $1.4 billion in New York. “Today is a hard day to gauge” because volume is limited on a day when many people aren’t at work.

Bove said U.S. bank shares and the dollar may eventually be helped by the Dubai crisis as investors seek relative safety.

“The U.S. dollar benefits because it remains a safe haven,” Bove wrote in a note to clients. “The U.S. banking system may actually benefit also as money seeks a safe haven in highly regulated institutions. Direct exposure of American banks is thought to be minimal.”

Exxon lost 2.1 percent to $74.87. Chevron Corp. fell 1.9 percent to $78.17. Crude oil futures fell to the lowest price since Oct. 14 as Dubai’s debt crisis prompted investors to sell commodities.

Gold Falls

Newmont Mining Corp., the largest U.S. gold producer, retreated 2.8 percent to $53.35. Bullion futures fell 1.3 percent to $1,172 an ounce in New York as gains in the dollar damped demand for the precious metal as an alternative asset. The Dollar Index rose as much as 1 percent after Dubai’s attempt to delay debt spurred investors to sell higher-yielding assets funded with the currency.

Industrial metals including copper and aluminum also declined, spurring losses in raw materials producers. Freeport- McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, fell 3.6 percent to $84.14. Alcoa Inc., the largest U.S. aluminum maker, retreated 2.6 percent to $12.66.

The Dollar Index added to yesterday’s 0.8 percent gain that lifted it from a 15-month low. Losses in the dollar over the past month, spurred by expectations the Federal Reserve will keep its benchmark interest rate near zero, had spurred demand for assets tied to global growth including stocks and commodities.

‘Extreme Overreaction’

“This is an extreme overreaction,” said Richard Campagna, who oversees $600 million as chief investment officer at 300 North Capital LLC in Pasadena, California.

Wal-Mart Stores Inc., the world’s largest retailer, kept stores open all night so shoppers could claim items that went on sale at 5 a.m. today. The day after U.S. Thanksgiving, the traditional beginning of the holiday shopping season, is termed Black Friday, possibly because some retailers become profitable for the year over the holiday weekend.

Shoppers also gathered at Best Buy Co., Target Corp. and Toys “R” Us Inc. stores across the country well before midnight yesterday to take advantage of deals on televisions, laptops and robot hamsters.

Members of more than a quarter of U.S. households plan to shop today, according to the International Council of Shopping Centers, a New York-based trade group.

Unemployment Rate

Hampered by an unemployment rate that exceeded 10 percent in October for the first time since 1983, shoppers plan to spend an average of $682.74 on Christmas gifts this year, compared with $705.01 last year, according to a survey by National Retail Federation.

Before today, the S&P 500 had risen 1.8 percent this week after sales of existing U.S. homes increased 10 percent in October to the highest level since February 2007, according to the National Association of Realtors.

Europe’s Dow Jones Stoxx 600 Index rallied 1.2 percent today, paring its two-day decline to 2.2 percent, after a gauge of European stock volatility posted its steepest surge in a year yesterday. The Shanghai Composite Index slumped 5.9 percent over the last two days. Credit-default swaps tied to debt sold by Dubai rose 105 basis points to 646 according to CMA DataVision.

The MSCI Emerging Markets Index, up 73 percent this year through Nov. 25, lost 1.9 percent.

A default by Dubai would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.

Dubai’s debt deferral “doesn’t look to me like a thread where if it gets pulled, things unravel completely,” Fifth Third’s Wirtz said. “Monday or Tuesday the market might show some resiliency again.” (Bloomberg)