Canada’s main stock index fell by 200 points yesterday as debt concerns in Dubai and job cuts at two big Canadian companies heightened anxiety about the stability of the current economic recovery. Financial stocks were among the hardest hit as investors wondered if banks had any exposure to bad debt in the Gulf. The news also triggered widespread concern about the financial health of the once-booming Mid-East region.

In short, given the current run-up in stocks investors did not need much of an excuse to book some profits and reduce their risk profile. The S&P/TSX composite index fell 200.10 points, or 1.72%, to 11,436.80 with 9 of the 10 sectors dropping as the Dubai news spread.
There’s a lot of nervousness by investors as a result of the announcement. Job cuts announced by train & plane maker Bombardier and telecommunications company Rogers added to worries about the Canadian economy, which is in the tentative stages of emerging from recession.

Debt problems in Dubai struck financial markets hard, lifting safe-haven bonds and driving the U.S. dollar higher. Gold climbed to a new record high but fell back as the U.S. dollar rose. European shares had their worst daily loss in 7 months. Banking stocks came under particular downward pressure in Europe because of potential exposure to any bad debt in the Gulf, as did shares in European car companies, some of which are part-owned by sovereign wealth funds from the region. Markets were trading without much input from the United States, as it was the Thanksgiving holiday. U.S. Markets have a shortened trading day today.

Dubai said on Wednesday it wanted creditors of Dubai World and property group Nakheel to agree to a $59 billion debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate’s breakneck growth. The announcement triggered widespread concern about the once-booming Gulf region’s financial health, although some investors differentiated between leveraged Dubai and other more solidly wealthy emirates and countries in the region (that are backed by Oil). However, the worries fed directly into a general nervousness in financial markets about the real state of the world economy at a time when investors are also seeking to lock in 2009 profits. The U.S. dollar gained sharply as investors shed riskier assets in the Dubai debt storm.

This morning commodities dropped the most since July as Oil is down 5%, gold fell 2% and emerging-market stocks fell. U.S. Treasuries and the U.S. dollar rose and the cost of credit default swaps (CDS) surged as Dubai’s attempt to delay debt repayments unnerved investors yesterday. Credit- default swaps tied to debt sold by Dubai rose 134 basis points to 675, according to CMA DataVision. The MSCI Emerging Markets Index of 22 developing countries dropped 2.6%. We are 1 month short of finalizing 2009, so you could see quite a substantial amount of investors cutting any potential losses now for year end window dressing.

The MSCI World Index fell 0.7%. Futures on the Standard & Poor’s 500 Index dropped 2.6% after U.S. markets were closed yesterday. The MSCI World has rallied 67% (local currency) since March 9th of this year and the Standard & Poor’s 500 Index has climbed 64% (US dollars) during the same timeframe in the steepest rally since the Great Depression. The rebound came as the Federal Reserve spent, lent or guaranteed $11.6 trillion and held interest rates near zero to unlock credit markets and end the 1st simultaneous recessions in the U.S., Europe and Japan since World War II. With central banks and governments having injected trillions of dollars into the current crisis it is hard to believe that a $59 billion standstill proposal is injecting renewed fear of a 2nd crisis or a doomsday scenario and that this could revive the whole financial crisis. However, it’s not the size of the issue that has made investors nervous it is who! Nobody expected Dubai and nobody expected it now.

In short, I would expect a healthy and quick stock market correction but thereafter stocks will look for some new information prior to determine the future short-term direction of stock markets.

Regards,

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

SVP & Partner