Global Selloff From Dubai Woes Shows Signs of Winding Down

Dubai debt default concerns rippled through world markets for a second day on Friday, but the exodus from equities and rush to the safe-haven dollar slowed as investors discounted contagion.

Dubai at night
Photo Source: Getty Images

US stocks initially fell more than 2 percent New York, the first day of trading after Dubai on Wednesday said it would ask creditors of two flagship firms, including conglomerate Dubai World, for a standstill on debt payments as part of a restructuring.

The potential magnitude of the event, measured by Dubai World's $59 billion in debt, unhinged markets on concern that the hangover from the credit-driven property boom may hold more harsh surprises for banks.

US and European stocks edged off lows or rose later in trading, however, signaling some investors expected the event would not derail a recovery. Europe actually closed higher while the US ended well off its lows.

"What we've seen is that once the dust settles, some of the markets that were hardest hit have rebounded," said David Katz, chief investment officer at Matrix Asset Advisors in New York. "It's a scare to the markets, but the U.S. has less exposure to Dubai than Middle Eastern and European banks."

The MSCI world equity index fell 0.8 percent after tumbling 1.3 percent to its lowest in 2-1/2 weeks, with the benchmark on track for a second consecutive weekly loss.

The MSCI since October has had trouble extending the rally that began in March as investors have raced to lock in gains ahead of year-end accounting.

The index is still up about 70 percent since early March.

Dubai struggled to ease fears of debt default by saying on Thursday its profitable DP World , which runs 49 ports around the world, would not be involved in the restructuring. DP World, which has $3.25 billion outstanding bonds, is majority owned by Dubai World but has shares listed on NASDAQDubai.

The emirate is a center for investment and a major source of capital for Western markets.

Investor appetite for risky assets bounced from a 23 percent drop on Thursday, with the VDAX-NEW volatility index down 3.3 percent.

The higher the index, which is based on sell and buy options on Frankfurt's top 30 stocks, the lower the market's desire to take risk.

The U.S. market volatility index declined 9 percent from its open, but at 23.61 remained 15 percent above its close on Wednesday.

Dubai Palm Island
Photo Source: AP

U.S. markets were closed on Thursday for the Thanksgiving Day holiday.

In currencies, the dollar rose as fears of a possible Dubai debt default sent investors into safe havens. The dollar rose against a basket of major currencies , up 0.15 percent at 74.938.spacer

"A combination of systemic risk fears and thin market liquidity due to the U.S. holiday season has proven to be a combustible mix and several currencies or currency blocs are feeling the impact," UBS currency analysts wrote in a note.

"The wider fallout has simply revealed how fragile both markets and risk appetite still are," they said.

The yen hit a 14-year high against the dollar before retreating when the Bank of Japan stepped close to currency intervention by checking exchange rates with commercial banks.

The dollar climbed 0.34 percent to 86.77 yen, while the euro fell 0.23 percent at $1.4976.

Commodity prices extended previous session's steep losses, with crude oil under pressure. U.S. light sweet crude oil fell $2.66, or 3.41 percent, to $75.30 per barrel. Spot gold fell $18.70, or 1.57 percent, to $1173.90.