Canada’s main stock index edged up 0.24% in a yo-yo session on Friday as gains in financial stocks overcame investor jitters over a possible debt default by the state-owned Dubai conglomerate. Financials rebounded from losses on Thursday when Dubai, a part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property unit Nakheel. Canadian Finance Minister Jim Flaherty said on Friday that the Group of Seven (G7) countries have discussed the potential fallout on the global financial system from Dubai’s delayed debt payments. He added that the Canadian banking regulator sees little or no impact on Canada.
Many banks outside the Gulf played down the concerns and European leaders said the world economy was now strong enough to cope with the setback.
The S&P/TSX composite index dropped 1% at the opening bell and then reversed course, rising nearly 1%, before tilting lower again to settle up. For the week, the TSX was down around 1%. U.S. markets were closed on Thursday for Thanksgiving Day and had a truncated session on Friday. Investors will now be looking to results from “Black Friday”, often the single busiest shopping day of the year in the United States, with many retailers offering big sales. Consumer spending accounts for about 2/3rds of the U.S. economy.
In the United States stocks fell more than 1% in a truncated session on Friday as a possible debt default by a Dubai state-owned conglomerate led to fresh concerns about the global financial system. The sell-off was broad, with selling concentrated mainly in the financial and commodity-linked sectors as investor’s trimmed positions in areas of the market most sensitive to economic uncertainty. After a slide of more than 2% at the open, the flight to less risky assets seemed to be subsiding, helping the major U.S. stock indexes ease back up off their lows. The U.S. dollar, which had jumped sharply as investors looked for a safe haven, pared gains and commodity prices stabilized.
The news out of the Middle East coincided with the desire by many investors to lock in 20% year-to-date gains in the S&P 500 after a terrible year in 2008. It is at least an early indication of whether investors believe this is one-time bad news or the tip of something really bad. At this time it looks like an isolated event and it’s likely not as bad as investors initially feared.
The Dow Jones industrial average dropped 1.48%, the Standard & Poor’s 500 Index dropped 1.72% and the Nasdaq Composite Index dropped 1.73%. For the week, the Dow dropped 0.1%, while the S&P 500 edged up 0.01% and the Nasdaq dropped 0.4%.
World leaders expressed confidence in the global economic recovery on Friday despite fears about a debt default by Gulf emirate Dubai, while major banks played down their exposure to the debt. Stocks were haunted by concern that banks were exposed to state companies in Dubai, whose rise from a “desert backwater” into the business hub of the world’s top oil exporting area lured expatriate cash and executives.
The crisis began on Wednesday when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once attracted celebrities and the super-rich. “While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with,” British Prime Minister Brown told reporters in Port of Spain. “The world financial system is stronger now and able to deal with the problems that arise.”
Dubai World had $59 billion of liabilities, most of Dubai’s total debt of $80 billion. International banks’ exposure related to Dubai World could reach $12 billion in syndicated loans, banking sources told Thomson Reuters LPC (see chart above). However, the numbers pale in comparison to the $2.8 trillion in write downs the International Monetary Fund (IMF) estimates U.S. and European lenders will have made between 2007 and 2010. “The events in Dubai in recent days are one of the hiccups if you like, one of the difficulties, which affirms that we were right to highlight the uncertainty ahead of us and that the road ahead could be a bumpy one,” European Central Bank Governing Council member Athanasios Orphanides said.
Early indications suggest that U.S. consumers turned out in strong numbers to hunt for holiday bargains on Black Friday, though many said they were spending selectively and industry executives questioned whether the momentum would last. The Friday after U.S. Thanksgiving is often the busiest shopping day of the holiday season, which accounts for nearly one-fifth of the retail industry’s annual sales. This year retailers and investors are paying close attention to signs of a consumer comeback that could propel the economy, after the 2008 holiday season saw the worst sales performance in nearly 40 years.
Up to 134 million U.S. consumers say they may shop for holiday gifts this weekend from Black Friday through Sunday, according to the National Retail Federation. Retail chains have insisted they will avoid the fire-sale discounts seen in 2008 and have spent the last year scaling back stores and shrinking inventory to protect their profits.
This week on the Toronto stock exchange we will see the debut of a brand new oilsands player and a more streamlined version of one of the continent’s top natural gas companies. Shareholders in EnCana supported the plan to divide the Calgary-based energy giant into two distinct companies. With that major milestone, EnCana and its oil-centred spinoff Cenovus Energy will start operating independent of one another tomorrow. It reminds me a little bit about when Bell Canada spun out Nortel in a butterfly restructuring for its investors (that in the end didn’t go so well).
This morning the Dubai stock market dropped by 7% but everything else is looking pretty flat to down. Dubai is still a warning sign that sovereign credit risks are likely to remain a problem and in the short-term stock markets will likely remain a little directionless. Considering the recent run up that is a huge victory for stock investors.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
