Shares skid on Dubai debt crisis, yen surges

RELATED NEWS Dubai crisis: Bank, realty stocks tank globally

Asian stocks slumped on Friday as shockwaves from Dubai's debt crisis hit the region, shaking banking shares and pushing the yen to a fresh 14-year high against a struggling dollar as investors unwound risky trades.

European shares were expected to open as much as 1% lower, extending the previous session's sharp sell-off after Dubai said two companies planned to delay repayment on billions of dollars of debt as a first step towarded restructuring.

US stock futures fell 3%, signalling a rough day for Wall Street, which was closed on Thursday for the US Thanksgiving holiday.

The shock Dubai news raised investor fears of debt defaults that could hit the global economy just as it is trying to recover from the financial crisis.

The MSCI index of Asia Pacific stocks traded outside Japan dropped over 3%, while the Thomson Reuters index of regional shares fell 0.63%.

Banking shares were among the worst hit on concerns about potential exposure to the billions of dollars in Dubai debt crisis. The MSCI index of banking shares in Asia Pacific outside Japan fell over 3.5%.

HSBC, whose London-traded shares lost 4.8% overnight, fell 6.1% to HKUSD 88.40 in Hong Kong. Standard Chartered, which fell 6% in London, dropped 6.4% to as low as HKUSD 190, its lowest since Oct 29..

Japan's top bank, Mitsubishi UFJ Financial Group, fell 3.8%.

Japan's Nikkei average skidded 3.2% to a four-month low, coming under additional pressure from weakness in exporters as the yen climbed to its highest level in 14 years against the dollar.

South Korea, Hong Kong and Taiwan were the biggest drags on the MSCI index, as these markets are most sensitive to the global economy.

"Some of the tensions can spill over into those economies which are externally dependant for funding their investment plans," said Binay Chandgothia, chief investment officer at fund manager Principal Global Investors in Hong Kong.

Dubai said on Wednesday it wanted creditors of state-owned Dubai World and its property subsidiary Nakheel, to agree to a debt standstill in a first step towards restructuring.

Dubai World, the conglomerate that spearheaded the emirate's breakneck growth, had some USD 59 billion in liabilities as of August.

The announcement sparked immediate rating downgrades of several government-related entities and sent the cost of insuring against the emirate's debt soaring and bond prices tumbling.

European shares had their worst daily percentage loss in seven months on Thursday and gold climbed to a record high of USD 1,194.90.

Debt Markets

Jitters about the state-owned firms in Dubai, an influential global financial hub, also hurt credit spreads as investors shied away from riskier assets in general.

The Asia ex-Japan iTraxx investment-grade index widened to 124/129 basis points (bps), the highest since Oct. 28, and compared with 112/114 bps on Thursday.

U.S. Treasuries advanced as buyers looked to safer assets.

The benchmark 10-year note rose 19/32 in price from late U.S. trade on Wednesday to yield 3.197%, down about 8 basis points. *

Chandgothia said some of the Asian falls could also reflect investors locking in profit after a strong rally, which has lifted the MSCI Asia Pacific ex-Japan index by over 60% this year.

"Even those who came in late into the rally late have made decent money, so there would be a tendency to take risk off the table. It's probably not a bad time to lock-in gains and let things settle down before taking the next step," he said.

As investors unwound their exposure to riskier assets, the yen soared against the dollar to a fresh 14-year high and also traded stronger against higher-yielding currencies like the Australian dollar.

The yen's rise has raised concerns it could hurt export earnings and push the Japanese economy back into recession.

"Similar stories as this Dubai one are likely to continue to come out, leading risk money to pull out from assets such as commodities and stocks," said Takahiko Murai, general manager of equities at Nozomi Securities.

Though Dubai's announcement was made on Wednesday, Asian markets were slower to react that those in other regions.

"Although there was talk of it before, there was uncertainty about the full impact," Andrew Sullivan, a sales trader with broker MainFirst Securities in Hong Kong, adding that initially it was seen as a debt restructuring exercise before the default fears set in.

"Until the details became clear, people were not so worried about the downside. It is a delayed reaction because more information became available overnight," he said.

Gold in Asia was hovering just below Thursday's record high while oil prices stood just below USD 76 per barrel.