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Stocks end higher as investors decide Dubai debt crisis is unlikely to spread

U.S. banks have little direct exposure to the Persian Gulf emirate, whose investment arm said last week that it would delay repayment of debt.

December 01, 2009|By Walter Hamilton
  • Dubai's main stock exchange resumed trading for the first time since the Persian Gulf emirate revealed its debt woes.
Dubai's main stock exchange resumed trading for the first time since… (Kamran Jebreili / Associated…)

Reporting from New York — In their first full day of trading after the disclosure of Dubai's debt trouble, U.S. financial markets appeared to conclude Monday that the crisis wouldn't derail the budding global economic recovery.

The Dow Jones industrial average fluctuated sharply during the day, and at one point was down almost 50 points, before finishing with a moderate gain of almost 35 points.

U.S. bank stocks surged, reflecting growing confidence that banks in this country don't have hidden time bombs related to the Persian Gulf emirate. An index of financial stocks in the Standard & Poor's 500 index jumped 2.7%.

And Treasury yields were relatively flat, signaling that investors weren't rushing for cover as they did after the collapse of Lehman Bros. last year.

But share prices retreated in Europe as investors worried that major banks there would incur significant losses on loans made to Dubai.

Asian stocks, however, rebounded Monday after sliding Thursday and Friday.

The Dow rose 34.92 points, or 0.3%, to 10,344.84. The broader S&P 500 gained 4.14 points, or 0.4%, to 1,095.63, and the Nasdaq composite index rose 6.16 points, or 0.3%, to 2,144.60.

The trading Monday, the last day of November, bolstered sharp monthly gains for the indexes. The Dow climbed 6.5% in November, marking its fifth straight monthly gain. The S&P 500 added 5.7%, while the Nasdaq rose 4.9%.

Investors appear to believe for now that the woes of Dubai World, a state-owned investment firm, will be limited to the Middle East and won't unleash a so-called contagion on other regions.

"By some typical measures, the prospect for contagion should be very small indeed," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Dubai surprised investors Wednesday when it sought to suspend payments for six months on $60 billion in debt that it took on in a massive infrastructure spending spree.

The move unsettled investors in part because it seemed to contradict a widespread assumption that oil-rich Abu Dhabi would make good on its neighbor's debts.

On Monday, investors took solace from analyst pronouncements that Dubai World's debt is tiny in the context of the global economy and that its woes don't signal similar troubles elsewhere.

Still, given that unexpected bolts from emerging markets have been known to upset the global economy, many investors remained anxious.

"The uncertainty of how many other Dubais there might be is what's hanging over markets all around the world," said Allen Sinai, chief global economist at Decision Economics Inc.

The central bank of the United Arab Emirates, of which Dubai is a part, pledged over the weekend to help prop up affected Middle Eastern banks.

But Dubai's government said Monday that it hadn't guaranteed Dubai World's debt and that the company's loans had to be restructured. That would imply lenders would sustain some losses.

In its first public statement, Dubai World said it was in talks with lenders to restructure about $26 billion in debt.

Although European bank shares fell Monday, analysts sought to put the Dubai debt into global context.

"The Middle East region is unlikely to be more than 1% to 2% of banks' exposures, and Dubai would be a small portion of this," analysts at Credit Suisse said in a report.

Justin Urquhart Stewart, marketing director of Seven Investment Management in London, said he expected the United Arab Emirates to pull Dubai out of its crisis. But he said the situation in the emirate underscored some bad lending decisions.

"This has to be the most obvious bubble . . . that anybody over the age of 6 would have looked at and said, 'Why on Earth are they doing all this development in the desert -- how sustainable is that?' " Stewart said.

In other market highlights:

* An index of retailing stocks in the S&P 500 fell 0.5% on Monday after the release of data showing that shoppers were exercising extreme caution with their holiday spending. Macy's sank 3.9% and Saks tumbled 6.4%. But shares of online sellers advanced on a report of strong Internet sales. Amazon jumped 3.2% and EBay surged 5.4%.

* American International Group sank 15% after an analyst said the insurer faced an $11-billion shortfall to cover potential property and casualty claims.

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