The emirate of Dubai, one of the seven United Arab Emirates, has been perhaps the ultimate poster child of excess. It is the land of the palm-shaped islands and the indoor ski slopes in the desert. Now it looks like Dubai banking and Dubai investment are in deep over their heads.
The main investment vehicle of Dubai banking, Dubai World, has asked that its payments on $59 billion it owes be suspended until May, signaling to the financial world that Dubai investment is severely strapped for cash. Dubai is the one emirate that does not have any oil of its own, but it had expanded at a breakneck pace in an attempt to become the main financial hub of the Persian Gulf region.
This Dubai banking news has given the world markets a severe case of indigestion as we in the States digested our turkey and stuffing. The initial reaction, interestingly enough, was a further sell off of the dollar, but it has since turned around. World stock markets sold off dramatically after this Dubai investment news, with most of the major markets falling by more than three percent.
Emerging markets are also down, but surprisingly by less than the developed markets, more like a little bit more than 2% on average. Commodities have also been hit hard, including gold which is down by $31.90, or 2.69%. Oil is being hit even harder, down by more than 5.0% and below its $75 support level.
Normally, Black Friday has been an up day for the market. That is not going to happen this year. The big question is if this Dubai investment news is the first of a series of sovereign defaults, or is a one-off affair.
In the overall scheme of things, $60 billion is not a huge amount, but it is not pocket change either. It is not clear where all the bodies are buried with respect to this Dubai banking loan, although it is thought that European banks like Credit Suisse (CS) have a bigger exposure to Dubai banking and Dubai investment than do U.S. banks like J.P. Morgan (JPM).
However, that is just direct exposure. As we saw last year, indirect exposures can sometimes be much bigger than the direct exposures, as they can be magnified by derivatives. This injects a lot of uncertainty into the market. People pull back from risk, which this latest Dubai investment and Dubai banking news presents.
I would expect that many of the areas that have done the best since the March lows in the stock market are going to be hit hard today. If this does turn out to be a one-time thing, and if the other emirates step up to the plate and back Dubai investment and Dubai banking, this will prove to be a great second chance for those that missed the big move in the market. If it is the start of a trend, we could be back to last year all over again. The odds favor the former, but they are not overwhelming odds.
My guess is that the chance that this Dubai investment news and the resulting market sell-off in Dubai banking and elsewhere is the start of a second great implosion in as many years in the markets is about one in six. It is probably not going to happen, but sometimes when you throw a pair of dice, they come up as doubles (1 in 6 chance of that happening). Probably the best thing to do today is to sit tight and see how things have shaken out by Monday.
We will keep investors up-to-date on similar Dubai investment and Dubai banking news as it comes out.
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