Dubai World, the city state's largest corporate entity asked creditors for a six-month stay on repayment of its $60 billion in debts. Asia and Europe markets sold off Thursday on the news, while the U.S. markets were closed for a holiday.
The selling resumed on Friday in Asia, with the Hang Seng Index down 4.8% and the Nikkei 225 Average down 3.2%, their worst percentage fall since March. Markets were struggling to figure out what kind of exposure banks had to Dubai debt.
Shares of heavyweights Standard Chartered PLC (2888.HK) and HSBC Holdings PLC (HBC) fell over 7% in Asian trading. The banks rank as the top two lenders respectively in the United Arab Emirates.
European shares pulled back from early lows to close out the trading week, as investors started to buy up shares battered in the previous session. Some banks such as Royal Bank of Scotland Group PLC (RBS) were up, gaining 2.3% on news it had signed a previously announced asset-insurance deal with the U.K. government.
"I think that people are using (the Dubai drop) as a buying opportunity," said Heino Ruland, strategist at Ruland Research in Eppstein, Germany.
But U.S. markets are still expected to take a hit from the Dubai news, at least initially.
"The indications are that we are going to see some profit taking, but I also think it's too early to say whether this is just profit taking or whether you will go back to crisis mode," said Lars Christensen, chief analyst at Danske Bank (DNSKY) in Copenhagen.
"Investors have been taken by surprise by all of this, which to some extent surprises me because the problems in Dubai are well known," said Christensen. "This comes at a time when investors are quite nervous about valuations in general, whether we're talking equities or currencies or fixed income."
Dubai's woes are providing "that shock that makes investors further reduce risk. One has to see this not only in terms of the Dubai situation, but in terms of market pricing and the fact we're nearing the end of the year," he continued.
Oil, gold and other commodities fell sharply on Friday. Oil futures were recently down nearly 5% to $74.06 a barrel, while gold futures dropped 2.5% to $1,158 an ounce.
The dollar continued to climb against its major rivals except the Japanese yen, as lower-yielding currencies benefited from safe-haven flows amid spreading fears of the financial fallout of Dubai's debt problems.
The dollar index, which measure the greenback against a trade-weighted basket of six major currencies, was at 75.319, up 0.7% on the day.
Yields on 10-year Treasury notes fell by 8 basis points, or 0.06 of a percentage point, to 3.19%.
Retail will also be in focus on Friday, which marks the biggest shopping day of the year - "Black Friday" for many retailers.
But Wall Street trading also tends to be notoriously thin the day after Thanksgiving, and a lack of volume could also exacerbate any downward moves. Volume during the past four weeks, going back to the start of the month, has been below the 2009 average, with volume last week nearly 25% below average, said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. one analyst at Miller Tabak.the analyst said.
Stephen Pope, chief global equity strategist with Cantor Fitzgerald in London, said investors need to keep Dubai's problems in focus. "Let's be clear because many are getting this wrong. Dubai World is not the government of Dubai. It is a private company that is government owned."
"The region is not collapsing, and after Eid Al Adha (the Muslim holiday) finishes on Sunday, 29th November expect more light to be shed on what is being done in the region," he said. Dubai World made the announcement after the close of markets there on Wednesday - just as Wall Street was headed off for its Thanksgiving break.
He and others were critical of the timing of the announcement and the manner in which it was done. Dubai World made the announcement after the close of markets there on Wednesday - just as Wall Street was headed off for its Thanksgiving break. Markets in Dubai will reopen on Monday.
Pope said the timing was "irresponsible. I see it finishing Dubai as a financial hub."
"The handling of the Dubai World restructuring has been an exercise in poor communication," added London-based Gavin Nolan, vice president for credit research at Markit, in a note to investors. "An unnecessary information vacuum has been created, with investors unsure of their positions."
Dubai's "spreads now have a considerable risk premium attached, and its mishandling of the episode will cost it dear when it next returns to the international capital markets."
-By Barbara Kollmeyer; 34 91 395 8131; AskNewswires@dowjones.com
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