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27 Nov, 2009 14:16

Dubai moratorium call sends shudder through global markets

Global markets have sold off over in the wake of a call by Dubai for a 6 month moratorium on an estimated $60 billion in debt, with the call also spiking a rebound in the U.S. dollar, and sending commodity prices lower.

Crude prices shed as much as 5% in the aftermath of the announcement with other commodities also taking a hammering, and gold plunging in early Friday trade to as low as $1140 an ounce after approaching $1200 on Wednesday.

The saw the Micex lose more than 4% in Thursday trade and continue on Friday losing nearly 5% early before rebounding to be at 1243, down 1.96% at 12.00 Friday, to bring it to 10% below its October high. The Dubai moratorium call comes in the wake of comments by Finance Minister Alexei Kudrin earlier in the week about what he saw as an ‘overheated’ market. The global sell off which has occurred on Thursday and Friday has seen all equities markets take a hit, with the U.S. dollar rebounding against all currencies, including the Rouble.

Danila Levchenko, Chief Economist at Otkrytie FK, sees the sudden drop in the Rouble against the U.S. currency reflecting both a global concern about the Dubai debt situation, combined with local moves to limit the Russian currency’s recent appreciation against it, as well as this weeks 9th rate cut for the year.

“Actually, there are internal and external factors. The former include the policy of Russia’s Government that won’t let the Rouble grow too high and a so – called seasonal factor. So, Russia’s authorities started its currency interventions, which was coupled with cutting interest rates, and now more Roubles come to the market, which usually happens at this time of the year, ahead of the budget implementation in December. As for the external factor, it’s all about Dubai’s default.”

He sees the impact in equities coming from the flight from risk which the Dubai debt call has triggered. It is seeing all emerging markets lower, including Russia, with the recent capital outflow also a factor, in the wake of a long rally in Russian equities.

“I think, the Dubai’s default will cause a negative attitude towards developing markets, which logically makes other stronger currencies including the Dollar go up. In these circumstances both the country’s currency and its stock exchange fall. As for Russia, a drop in its financial market was a result of a mere technical correction after a long period of overheated market, which was coupled with the capital outflow.”

Finam Portfolio Manager, Sergey Belov, is more optimistic, seeing the Dubai news as adding additional volatility in the short term. But he also notes it comes in the context of Russian equities being widely perceived as having got ahead economic fundamentals, and that once the short term concern as dissipated they will rebound after a correction.

“I think, this is short term news and the Russian market will be back already next week, maybe even this evening. Talking about the Rouble’s movements, it was just a downward correction, cooling of the overheated market.”

Mark Rubinstein, Senior Analyst at IFC Metropol is also seeing the volatility as a short term issue, noting that it provides an ideal moment for investors to take profit in U.S. dollar denominated assets, with the Dubai debt issue unlikely to have a major global effect.

“Russia’s stock market did fall earlier this morning but this was short term, really, and it’s coming back already now. That was just a good ground for investors either to fix their profit in Dollars or to enter attractive companies, while their Rouble denominated assets are cheap. And, I think, Dubai’s call won’t affect the rest of the world either, as Dubai World owes most of its debt to domestic investors.”

On the Rouble, Rubinstein sees the added effect of the sharp falls over the last week in commodity prices. He believes that economic fundamentals will support the Russian currency going forward.

“I’m fully optimistic about the Rouble both long and short term, as the fundamental factors deciding its rate are still there. I mean, interest rates remain high. In addition to that, foreign investment keeps on coming into the country and there’s a major interest in Russian assets from all over the world.

Read also – Russian Markets Lose $26 Billion Over Dubai World Default News