Given substantial falls in Asian and emerging markets this morning and a half-day holiday session on Wall Street, UK equities fared relatively well on Friday considering the high level of uncertainty surrounding Dubai World’s debt default.
Having dropped 3.2% on Thursday following Wednesday evening’s announcement from Dubai’s government investment company, the FTSE 100 index initially extended losses on Friday morning but by close of play had recouped a small portion of this drop. The UK benchmark closed 51.6 points or 1.0% higher at 5,245.7, while the FTSE 250 index added 151.0 points or 1.7% to 9,031.5.
Wall Street reopened in negative territory on Friday for a truncated session following the previous day’s celebration of Thanksgiving. The timing of the Dubai news means that US stocks have so far been spared the worst of the sell-off—an extra something for US investors to be thankful for, though Monday’s markets could bear the brunt of it. In Asia, the Nikkei 225 index saw its largest one-day drop in eight months on Friday, while Hong Kong’s Hang Seng tumbled as much as 5.1% lower.
Dubai World announced on Wednesday that it is seeking to delay repayment of much if its $59 billion debt by six months, putting considerable upward pressure on emerging markets credit-default and subsequently weighing heavily on emerging market currencies. The news came on the last day before the start of the region’s Eid festival, during which stock markets are closed until December 6, leaving investors wondering when they would be able to gain further understanding of the investment company’s situation. Dubai moved to reassure investors of its position late Thursday, when chairman of the Supreme Fiscal Committee Sheikh Ahmed bin Saeed al-Maktoum said the government understood the concerns of both the market and Dubai World’s creditors and that additional information would be given next week.
Commenting on the impact of a debt repayment delay, Chris De Pury, commercial real estate partner at Berwin Leighton Paisner LLP, said: “The effects will not be as bad now that the banks have rebuilt their balance sheets, and we should be extremely grateful that this did not happen last year when it may have been the news that would have pushed things over the edge.”
Contemplating whether Dubai World is ‘too big to fail,’ Du Pury answered “Yes, the global economies have already demonstrated how they can coordinate action to mitigate the effects of such an event … This is the next challenge and it must be met.”
Having slumped yesterday amid fears of the impact of such developments on European lenders, British banks were back on solid ground by Friday’s market close. Royal Bank of Scotland, which is understood to have arranged 17% of Dubai World’s loans since January 2007, according to a JP Morgan research note, rebounded with a 5.2% gain after today signing an agreement to join the UK government’s Asset Protection Scheme. The bank will seek shareholders’ approval at a meeting on December 15.
Barclays added 2.3%, Standard Chartered rose 0.4% and HSBC ticked up 0.1%, while London Stock Exchange, which suffered substantial losses in the previous session--hit by a double whammy of Dubai's news plus a technical fault that halted trading for three hours, took on 2.9%.
The FTSE 100’s main casualty—standing out by a mile—was Lloyds Banking Group, which plunged 34.0% lower as the stock traded ex-rights following shareholders’ overwhelming approval of the bank’s record rights issue at the extraordinary general meeting yesterday.
In other equity movements, miners and oil producers rebounded from the previous session’s dive, thus helping to keep the blue-chip index on positive terrain for the day. Metal extractors Xstrata and Lonmin climbed up 4.9% and 3.5%, respectively, oil exploration companies Cairn Energy and Tullow Oil gained 3.7% and 2.2%.
Among the relatively few index casualties, retailers Next and Home Retail Group were under the cosh following a Goldman Sachs pan-European sector note, in which the broker downgraded its recommendations on both stocks, while mid-cap peers Kesa Electricals and DSG International suffered a similar fate. All four stocks fell between 0.7% and 1.4% on their respective indices.
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