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Friday, November 27, 2009

Morning Market Report

It will be a short trading day today. It may not however be a quiet one. The futures are being rocked by news that the country of Dubai is asking creditors for a six month moratorium for its two biggest companies, Dubai World and Nakheel.

Dubai, which became a trading and tourism hub and enjoyed a construction boom before the crisis, said it would ask creditors of Dubai World and Nakheel to agree a 6-month standstill on billions of dollars of debt which it is seeking
to restructure.

Dubai World has $59 billion of liabilities, most of Dubai's total debt of $80 billion. Nakheel is the builder of three palm shaped islands off Dubai.

Dubai is asking for six months while the two attempt to restructure the debt. Shares in Europe were off about 3% yesterday on the news. While equities are responding unfavorably to the news, bonds are responding quite favorably. The ten year U.S. Treasury bond is currently trading at 3.21%, the lowest it's been in months. The yield spread has also tightened between the 2 and 10 year bond and is now at 2.52%. The 3 month t bills are better this morning but still above 0%. They're currently at .02% after dropping into negative rate territory for parts of last week. Oil is down over $3 a barrel to $74.02 a barrel. Gold is also taking a major breather this morning. It's off by over $25 an ounce is currently trading at $1161.50 an ounce.

Meanwhile, the dollar is performing better for the most part this morning. It's up by .85% against the Euro, up by .84% against the British Pound but down slightly by .12% against Japanese Yen. It still maintains the inverse relationship with equities and thus the troubling trend that causes.

In the Far East, the Hang Seng was down 4.84%, the NIKKEI was down 3.21%, and the Straits Time Index was unchanged. The broad Chinese index was off 2.36%. In Europe, they had taken their beatings yesterday. Most indices were up slightly this morning. The FTSE in London was up .1%, the DAX in Germany was up .21% and the Spanish index was up .13%.

The three major U.S. indices are each down more than 2% this morning. According to Bloomberg, the biggest creditors for Dubai are HSBC, Chase and the Royal Bank of Scotland.

Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, the state company seeking to reschedule debt, while HSBC Holdings Plc has
the most at risk in the United Arab Emirates, according to JPMorgan Chase & Co.

RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report
today, citing Dealogic data.
HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008, JPMorgan said, citing the Emirates Banks Association. Abu Dhabi Commercial Bank PJSC may be owed $1.9 billion by Dubai World, making it the largest creditor outside the emirate, said two people familiar with the companies.

Investment analyst Mohammed El-Erian told CNBC that this fallout is a "correction not a crisis"

Dubai's debt woes may serve as a catalyst for a correction in stock markets but it does not signal a new crisis, investment manager Mohammed El-Erian told
CNBC Friday.

Investors dumped stocks Thursday and Friday and took refuge in the dollar
after Dubai announced it had asked for a 6-month standstill on debt of around $59 billion. Some analysts said the fears will be short-lived and the situation creates buying opportunities.

Only time will tell on that. It's not often that countries ask for their debt to be restructured and Dubai's economy was booming only a couple years back. Most importantly, the news continued to trend of the inverse relationship between the dollar and equities.

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