Stocks dropped around the world, Treasuries jumped and credit default swaps climbed after Dubai’s attempt to reschedule its debt rattled investors. The dollar briefly fell below 85 yen, a 14-year low, before erasing most of its losses on speculation Japan will intervene.
The MSCI Asia Pacific Index slid 2.3 percent to 114.86 as of 1:30 p.m. in Tokyo, the biggest drop since Aug. 17. Standard & Poor’s 500 Index futures dived 2.3 percent. Ten-year Treasury yields fell seven basis points to 3.20 percent, the lowest level in seven weeks. The yen climbed as high as 84.83 per dollar, the strongest since July 1995, before paring its advance to 86.46.
Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment on much of its debt. Japan’s Finance Minister Hirohisa Fujji said he may contact the U.S. and Europe to act on currencies, signaling his growing concern that the yen’s ascent will hurt the economy.
“If Dubai has to default, that could start a wave of defaults in other areas,” Mark Mobius, Chairman of Templeton Asset Management Ltd. said in an interview on Bloomberg Television from Hanoi. “This may be the trigger to allow for the market to take a rest and pull back.”
Banks were the biggest drag on the MSCI Asia Pacific Index today. HSBC Holdings Plc, Europe’s largest lender, tumbled 6.1 percent to HK$88.40, while Standard Chartered Plc sank 5.8 percent to HK$191.30. Goldman Sachs analysts led by Roy Ramos estimated potential credit losses at HSBC will be $611 million, and $177 million for Standard Chartered, according to a research report today.
Exporters Slump
Makers of electronics and cars contributed the most to the Topix index drop in Japan as the yen’s gain threatened to erode overseas earnings. Sony Corp., which makes the PlayStation 3 game machine, fell 3.6 percent to 2,285 yen. Honda Motor Co., a carmaker that gets 47 percent of its sales in North America, lost 2.9 percent to 2,685 yen.
Dubai concerns yesterday drove Europe’s Dow Jones Stoxx 600 Index down by 3.3 percent, the most since April 20. The MSCI World Index sank 0.5 percent today after yesterday’s 1.4 percent drop. The Morgan Stanley Emerging Markets Index, which has gained 67 percent this year, fell 1.8 percent, adding to a 2.1 percent drop yesterday. The U.S. markets were closed yesterday for the Thanksgiving holiday.
Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG.
‘Contagion Effect’
“People are worried about the contagion effect from Dubai,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which holds $75 billion in assets. “Events like this bring back all the bad memories from the global financial crisis.”
Shares of building companies fell on concern they may lose revenue from Dubai. Obayashi Corp fell 11 percent to 276 yen, while Kajima Corp., Japan’s biggest listed construction company, slid 9 percent to 172 yen. The companies may lose “tens of billions of yen” should they fail to receive revenue from their projects, Hiroki Kawashima, an analyst at Daiwa Securities Group Inc., said in a Japanese-language report today.
The MSCI Asia Pacific Index has climbed 63 percent from a more than five-year low on March 9 amid signs stimulus measures were reviving economies following the worst financial crisis since the Great Depression. Writedowns and losses stemming from the crisis have risen to more than $1.7 trillion since 2007, according to Bloomberg data.
Intervention Risk
Japan’s Fujii said Group of Seven nations “will do what is necessary.” Financial Services Minister Shizuka Kamei urged an international response to halt the currency’s gain.
“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The Bank of Japan may sell the yen “and buy Treasuries, which will be a plus for Treasuries.”
Treasuries rose the most in almost two weeks and the yield on the benchmark 10-year note touched 3.18 percent, the lowest since Oct. 8. Yields on five-year Japanese government bonds sank to the lowest since 2005, while yields on 10-year Australian government bonds lost eight basis points. The yield on South Korea’s 4 percent bond due June 2012 fell 16 basis points to 4.07 percent.
Dollar, Yen
The yen and the dollar rose against all of the rest of the 17 most-active currencies as investors exited high-yielding assets. The Australian dollar fell 1 percent to 90.46 U.S. cents and the Korean won declined 1.2 percent to 1,169 per dollar. Commonwealth Bank of Australia recommended buying Australia’s currency on declines in a note released today, describing Dubai’s payment delay as a “storm in a teacup.”
The United Arab Emirates, which is forecast to return to its long-term average current account surplus of 13.7 percent of gross domestic product, probably won’t let the investment company default, wrote Richard Grace, chief currency strategist in Sydney for the bank.
“Dubai has prompted a wave of risk aversion globally,” said Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong. “This might prompt a short sell-off in the won but I think that’s what it will be. It’s not going to be a huge fallout because Asia looks more solid in terms of fundamentals.”
Asia bond risk climbed today. The Markit iTraxx Japan index jumped as much as 23.5 basis points, according to Morgan Stanley. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan added 9 basis points to 126 basis points in Hong Kong, according to ICAP Plc.
Crude oil dropped 2.7 percent to $75.87 a barrel in New York and is poised for a weekly decline. Gold for immediate delivery fell 0.2 percent to $1,186 an ounce. Copper in London gained 0.3 percent to $6,841 a metric ton after slumping 2.4 percent yesterday.
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