Global Markets Weekly - 30 November 2009
- Equity markets tumble as Dubai World announces it will postpone debt repayments.
After scraping through to a new high for the year last Wednesday, equity markets experienced their biggest one day fall in almost eight months on Thursday, with the FTSE down 3.2%, after Dubai World announced that it would delay making debt repayments for six months. Banking stocks were particularly hard hit, due to concerns about their exposure to the region. The FTSE banks index fell 6%. At $50 billion, the amount UK banks have lent to the United Arab Emirates (UAE) is on a par with that lent by the US, Europe and Japan combined.
- Multiple triggers lie behind the sell off in risk assets.
The extent of the fall in equity markets reflects four main factors. First, the move came as a surprise to investors. Although it was well known that Dubai had serious problems, it was assumed that these were being worked through and that the other UAE countries would stand behind Dubai if necessary. Second, coming at the time of the Eid and the Thanksgiving holidays meant that the market was caught off-guard by the announcement. Third, investors have very little conviction in the 50% plus rally that equity markets have experienced since March. There is some suspicion, wrongly in our view, that the market rally has been driven solely by policy makers pumping liquidity into the system rather than by an improvement in economic fundamentals. Fourth, with year end approaching, some investors viewed the Dubai news as an opportunity to take profits.
- The Dubai World news does not appear to be a systemic event.
Dubai credit default swaps climbed 230 bps to 540bps. Other Gulf states and emerging markets with perceived problems also came under pressure. Hungary, which has had problems refinancing debt, and Greece, which has one of the highest debt burdens in Europe, also saw the cost of insuring their debt soar. Cyclically sensitive commodities sold off with oil falling 6% and copper 5% as investors ran for cover. Spreads on emerging market government debt widened slightly, mainly due to US bond yields, as opposed to emerging market debt, falling. We do not believe the events in Dubai affect the positive outlook for emerging markets. Dubai was an extreme case of past financial excesses coupled with dependence on external demand.
- Currency trends continued largely uninterrupted.
Gold hit a new high, prior to Dubai dropping its bombshell, as the IMF announced that it had sold Sri Lanka $375 million worth of the yellow metal. This continues the trend of central banks diversifying their reserves out of paper currencies. The US dollar barely benefited from last week’s market turmoil. Last week’s events merely temporarily stalled the dollar’s decline. Among the major currencies it was the Yen that benefited the most, rising 2.5% on a trade weighted basis.
- G7 government bonds were the main winner last week.
Yields on 10-year government bonds fell by up to 20 bps, augmenting November’s slide. Our analysis of the relationship between bond yields and output gaps indicates that there is scope for government bond yields to fall further in the months ahead.
- Equities require profits growth to continue to advance.
Dubai’s actions come as a nasty reminder that the after effects of the credit fuelled property bubble bursting, financial crisis and global recession, will be with us for a considerable period. The fall in equity markets it has triggered is probably a buying opportunity. That said, there is limited scope for equity markets to re-rate further. Future gains will have to be driven by profits growth as opposed to by valuations. Consequently, equity market momentum is unlikely to be as strong over the next six months as it has been over the past six.
Indices, Interest rates and Inflation
|
Close - 27 Nov 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,677 |
-0.3 |
0.5 |
7.1 |
21.2 |
|
FTSE 100 |
5,246 |
-0.1 |
0.9 |
7.7 |
18.3 |
|
S&P 500 |
1,091 |
0.0 |
2.6 |
5.9 |
20.8 |
|
Nasdaq Composite |
2,138 |
-0.4 |
1.1 |
5.5 |
35.6 |
|
DJ Stoxx (Europe) |
263 |
-0.3 |
-0.5 |
2.1 |
18.3 |
|
Nikkei 225 |
9,082 |
-4.4 |
-11.1 |
-13.3 |
2.5 |
|
Hang Seng |
21,135 |
-5.9 |
-4.7 |
4.4 |
46.9 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Mar-10 Forecast |
Jun-10
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.50 |
-1.3 |
16-Dec |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.1 |
10-Dec |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.3 |
03-Dec |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.2 |
18-Dec |
View the full Global Markets Weekly report (pdf).
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