Weekend Update

Uncertainty on Dubai Debt Implications Hit Markets

Stocks closed down but off session lows in light trading on Friday, as traders assessed the implication of Wednesday;'s announcement that Dubai World - a holding company that carries a majority of the UAE state's debt - asked for a delay in repaying some of its $59 billion in debt. US equity news was light, with AIG settling disputes with former CEO Hank Greenberg and MGM Mirage indicating that their joint venture with Dubai World was fully funded and unaffected by Dubai's request for a delay in repaying debt. There were no major economic reports out of the US, and Treasuries and the US dollar saw strength in a flight-to-safety and as traders sought to take some of the "risk-trade" off the table, taking profits from a strong run in stocks in 2009. European markets rose after having two sessions to digest the Dubai news, while Asia was lower.

The Dow Jones Industrial Average lost 154 points (1.5%) to close at 10,310, the S&P 500 Index declined 19 points (1.7%) to 1,091, and the Nasdaq Composite fell 38 points (1.7%) to 2,138. In light volume, 655 million shares were traded on the NYSE and 950 million shares were traded on the Nasdaq. Crude oil was $1.83 lower at $76.13 per barrel, wholesale gasoline fell $0.04 to $1.96 per gallon, and the Bloomberg gold spot price decreased $17.96 to $1,170.43 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 1.0% to 74.99 from Wednesday’s close. For the week, the DJIA lost 0.1%, while the S&P 500 Index was flat and the Nasdaq Composite was declined 0.4%.

Equity news was light in abbreviated trading, but a day which typically is dominated by focus on anecdotal reports on shoppers appearing for "Black Friday," had traders focused on Wednesday's announcement from Dubai, one of the seven states that comprise the country of the United Arab Emirates, the capital of which is Abu Dhabi. The emirate announced that it would ask creditors of Dubai World-a privately-held holding company for the government of Dubai-to agree to a temporary "standstill" to delay repayment on some of the liabilities that the government has in the holding company's fund, as an early step to restructuring its debt agreements. Dubai World holds about $59 billion of Dubai's total $80 billion in debt reported on its balance sheet, and the announcement is sparking concerns about the financial health of emerging markets and the impact on developed nations' exposure to the debt of Dubai, which surged as the region has gone through a massive construction boom in the past few years.

MGM Mirage (MGM $11), a partner with Dubai World, was under pressure amid the aforementioned worries about the emirate's debt. However, MGM told Reuters that the company's joint venture-an $8.5 billion project on the Las Vegas Strip-is fully funded and unaffected by Dubai World’s announcement.

American International Group Inc. (AIG $33) agreed to settle disputes with former CEO Hank Greenberg after four years of disagreement between the company and Greenberg. AIG agreed to drop a $1 billion claim against Greenberg and reimburse legal fees and expenses for Greenberg and former CFO Howard Smith. In a statement, Greenberg said he looks forward to assisting AIG in preserving as much value as possible for all AIG stakeholders, which is 80% owned by US taxpayers. Shares were lower in concert with general market action.

Treasuries rise in flight-to-safety while no major US economic reports today

Treasuries were higher as traders returned to action following Thursday's Thanksgiving holiday, reacting to Wednesday's announcement from Dubai. There were no major US economic reports released today. The yield on the 2-year fell 6 bps to 0.68%, the yield on the 10-year note lost 6 bps to 3.21% and the yield on the 30-year bond declined 3 bps to 4.20%.

Dubai debt fears pare weekly gains

All seemed well for the equity markets ahead of Thursday's Thanksgiving holiday break as the equity markets were poised for another strong weekly advance on preserved optimism that the global economic recovery continues to gain traction. US economic data helped support this optimism as the pre-holiday sentiment was sweetened by upbeat reports with new and existing home sales growing much more than expected, weekly initial jobless claims falling below the 500,000 mark, personal income rising more than anticipated, and consumer confidence unexpectedly increasing. Moreover, the release of the Federal Reserve's minutes from its last monetary policy meeting, which concluded on November 4th with the Federal Open Market Committee (FOMC) keeping the fed funds rate near zero, might have had the biggest influence on the major markets' strong showing in the first half of the week. The FOMC's report showed participants increased their 2009 and 2010 GDP growth forecasts and viewed the risks to their forecasts as being roughly "balanced rather than tilted to the downside," but uncertainty surrounding these forecasts was still viewed as "quite elevated." Additionally, the Fed added that the recent fall in the value in greenback had been "orderly" and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year. The upbeat reports more than offset a downward revision to US 3Q GDP and an unexpected drop in durable goods orders.

However, the solid weekly gains waned as traders that decided not to make it a long weekend and return on Friday booked profits from the surge in the equity markets since March, spurred by fears about the potential impact off Dubai's debt repayment delay announcement on the continued recovery in the global economic recovery.

The pace of job losses is expected to continue to improve

The ISM Manufacturing Index will be released on Tuesday, forecasted to decline to 55.0 in November from 55.7 in October, indicating expansion in the manufacturing sector, albeit at a slower pace, and coming after the index posted a significant jump last month from 52.6 in September. Thursday brings the companion ISM Non-Manufacturing Index, expected to have increased to 51.5 in November after falling to 50.6 in October from September’s level of 50.9.

Traders will be watching the employment components of both ISM indices for signs that the pace of job losses is continuing to improve, and the ADP Employment Change Report on Wednesday will give the market another read on the employment situation. The forecast is that private sector employers shed 148,000 jobs in November after declining 203,000 in October.

The Federal Reserve will also be in the headlines next week, with the release of the Beige Book on Wednesday, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for December 15-16, and is used as an input to the Fed's decision on whether to make any changes in monetary policy. On Thursday traders will be watching Fed Chair Ben Bernanke's Congressional testimony as part of his confirmation process, ahead of the January 31, 2010 expiration of his four-year term as Chairman, although he has been appointed as a member of the Board through January 31, 2020.

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting the decline in payrolls improved to a decrease of 114,000 in November, after falling 190,000 in October, and the unemployment rate is estimated to be flat at 10.2%, after jumping in October from 9.8% in September.

Other releases on next week's busy economic calendar include the Chicago Purchasing Manager report, construction spending, pending home sales, factory orders, MBA Mortgage Applications, nonfarm productivity, initial jobless claims, and factory orders.

International markets continue to analyze Dubai fallout

Stocks in Europe rebounded off session lows to end higher in their second session of digesting the news from Dubai. Per Reuters, JPMorgan Chase analysts said that they were less concerned about global banks' direct exposure to Dubai World’s $59 billion debt, which may have helped soothe some concerns across the pond and assist in the resiliency in the eurozone region. Additionally, a measure of eurozone consumer confidence improved from -18 to -17, matching expectations of economists surveyed by Bloomberg, while another report showed eurozone economic confidence rose from a slightly downwardly revised 86.1 in October, to 88.8 in November, above the 88.0 that economists forecasted.

Stocks in Asia were solidly lower across the board, led by financials with exposure to Dubai. However, traders did get some positive news out of China after officials convened in an annual planning meeting and pledged to keep stimulus measures intact to support growth next year, saying they would "continue a proactive fiscal policy and a moderately easy monetary policy" while shifting emphasis from state-led investment to encouraging more consumer spending and private investment. Meanwhile, after the close of trading in Japan, the yen reacted to speculation that the Bank of Japan may intervene to stem the upward momentum of the Japanese currency, after Japan’s finance minister said he will contact US and European officials about the exchange rated if needed, according to Bloomberg news.