Today will be a very interesting day in stock markets as the U.S. stock market is closed for Thanksgiving and will only open for a ½ day tomorrow. Overnight, Dubai’s attempt to reschedule its debt rattled investors seeking higher returns in emerging markets. The Shanghai Composite Index slumped 3.6% on the news, its biggest drop since August. Credit-default Swap tied to debt sold by Dubai rose by 1.31% to 5.71% according to CMA DataVision. This means investors who own Dubai debt are willing to pay another investor 5.71% per year to effectively guarantee a risk-free rate of return.

Dubai World, the government investment company which is burdened by $59 billion of liabilities, “shocked” markets around the world by seeking to delay repayment on much of its debt. In short, Dubai is not helping investors who are increasing their risk appetite and this will keep stock markets volatile and edgy. Stock futures in North America are point down about 1% while commodity prices are down. Bond prices are up and European markets have declined by as much as 2% this morning. Investors are worried about the systemic risk that could potentially “fall out” of an emerging market sovereign debt “fall out”, if that scenario came to fruition.

European banking shares, which had recovered over the last 6 months on hopes the worst of a global economic crisis was over, fell to lows not seen since May on fears of exposure to Dubai. Dubai, whose extravagant building projects have been largely put on hold since the crisis said it would ask creditors at flagship firms Dubai World and property developer Nakheel, to delay repayment on billions of dollars of debt. Dubai will likely ask for help from some of its rich and deep pocketed neighbors to help them out of this predicament.

(Pictures courtesy of Bloomberg and Reuters respectively)

Yesterday Canada’s main stock index closed higher as a record high gold price & a turnaround in oil prices boosted resource shares and the Canadian dollar. Gold prices surged above $1,180 an ounce on U.S. dollar weakness, while the price of oil settled near $78 a barrel on lower-than-expected builds in U.S. oil inventories. The energy & materials groups were the biggest gainers, rising 1.18% and 1.89%, respectively.

The stock market responded to upbeat U.S. October consumer spending and weekly employment data, embracing the data as further signs of the strength of the economic recovery, and looked beyond an unexpected fall in durable good orders.

The S&P/TSX composite index closed up 0.84% with 9 of the 10 sectors posting gains. Banks are likely to be key drivers of the index in the next 2 weeks as their earnings results continue to be announced. Commodity shares may also extend gains, particularly as the investors expect central banks from emerging economies to keep buying bullion from the International Monetary Fund (IMF).

In the United States stocks rose supported by data that pointed to stabilization in the employment and housing markets, areas that have fed investor concerns about a “double dip” recession. The Dow Jones industrial average gained 0.29%, the Standard & Poor’s 500 Index gained 0.45% and the Nasdaq Composite Index gained 0.32%. The Chicago Board Options Exchange (CBOE) Volatility Index or the VIX, a favourite barometer of investor sentiment, dropped to its lowest level in 15 months, falling as low as 20.05 during the day. Yet another government report showed U.S. consumer spending increased more than expected in October, while a final reading of consumer sentiment was revised up slightly in November, but was still down from October’s reading, according to the Reuters/University of Michigan survey.

A surprise decline in orders for long-lasting U.S.-made goods and a 2nd straight monthly drop in consumer confidence, however, offered a reminder that the recovery from the most brutal recession in 70 years would be gradual. The economy resumed growth in the 3rd quarter, helped by government programs such as a popular $8,000 tax credit for 1st time home buyers, which continues to prop up sales.

The Commerce Department said yesterday that consumer spending, which normally accounts for over 2/3rds of U.S. economic activity, increased 0.7% last month after falling 0.6% in September. Separately, the U.S. Labor Department reported that initial claims for state unemployment benefits slid to 466,000 last week, the lowest in more than a year, from 501,000 the prior week. It was the 4th straight weekly decline and the 1st time since January that claims dipped below 500,000. Another Commerce Department report showed sales of newly built U.S. single-family homes surged 6.2% to a 1-year high last month. Sales hit a 430,000 unit annual pace, up from 405,000 in September and beating expectations for a 410,000 unit pace. The rise in housing sales pushed the supply of new homes on the market down to 239,000 units, the lowest level since May 1971. Falling house prices and low mortgage rates are also contributing to the recovery in the housing market, whose collapse was the main trigger of the recession.

U.S. 30-year mortgage rates dropped in the past week to match a record low set in April, while the 15-year home loan rate fell to a new all-time low, Freddie Mac reported. Data earlier this week showed sales of previously owned homes jumped to their highest level in more than 2 ½ years last month, and the decline in prices moderated. Economists are hoping signs of stability in the housing market will help to improve the psychology of households, shattered by the highest unemployment in 26 ½ years, but confidence remained shaky. The Reuters/University of Michigan Surveys of Consumers’ final index of consumer sentiment in November came in at 67.4, down from October’s 70.6 but up from an initial 66.0.

As mentioned, stocks are looking to open down this morning but considering that most stock markets are up between 4% and 7% this month things are still looking very favourable on a long-term basis.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner