Wall Street Begins To Stabilise After 2% Slip: Financial Spread Betting

Posted on | November 27, 2009 |

Wall Street, which resumed trading following Thanksgiving holiday yesterday, slumped by over 2% during the first half hour of the opening bell today, as investors feared that Dubai’s debt troubles will derail the global economic recovery.

UBS sent shivers running down the spines of investors today, after saying that Dubai may owe more than most of us may anticipate.

‘Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,’ said Saud Masud of UBS today. ‘This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.’ [1]

The negative reaction on Wall Street had been widely expected after all. US banks took a knock on the back of fears that their exposure to a potential default on Dubai’s debt would spur further write downs. Citigroup saw its share price retreat 1.2% to $4.12 while Bank of America declined 1.7% to $15.68. Goldman Sachs and Morgan Stanley were among the casualties as well, with the former down 2.2% to $165.12 and latter 2.9% lower at $30.52 a share.

Heightened levels of risk aversion encouraged investors back to the safety of the US dollar, which, in turn, exerted pressure on commodity prices and miners. Freeport-McMoRan Copper & Gold saw its share price slide 3% to $84.68, while Newmont Mining’s shares dropped 2.7% to $53.41.

Retail shares, although lower, performed relatively better than the mining and banking sectors, with Wal-Mart Stores dropping by only 0.8% to $54.52 and Sears down 0.3% to $72.21.

Investors were easier on retail shares on the view that the Black Friday shopping session was doing quite well - this is meant to be the single busiest shopping day of the holiday season, accounting for approximately 20% of the retail industry’s annual sales.

According to a survey compiled by the National Retail Federation, up to 134 million US consumers said they may shop for holiday gifts this weekend from Black Friday through Sunday. This is an improvement over last year’s survey.

Macy’s CEO Terry Lundgren said retail should have a decent holiday performance this year. ‘That’s very different than last year,’ Lundgren told CNBC. ‘Last year we were falling off a cliff, grabbing for branches on the way down.’ [2]

Encouragingly, there has been a change in sentiment since the open, with Wall Street seen paring earlier losses. By 3:40pm (London time) the Dow Jones Industrial Average was trading 151.76 points (-1.45%) lower at 10312.64 while the broader S&P 500 was 17.4 points (-1.57%) below its previous close at 1093.23. The Nasdaq, meanwhile, fell 24.3 points (-1.36%) to 1769.36.

At the same time, the FTSE 100 managed to claw back all of its earlier losses and climb 52.61 points (+1%) to 5246.74.

UK banks added the most points to the index, with Barclays seen 3.6% higher to 301.65p and Royal Bank of Scotland up 5.9% to 34.95p. HSBC was practically unchanged at 706.3p while Lloyds Banking Group traded at 57.5p after adjusting to the additional shares from the rights issue.

Meanwhile, JPMorgan Chase today said that HSBC has the ‘largest absolute exposure’ in the United Arab Emirates, with $17 billion of loans in 2008. JPMorgan also said that Royal Bank of Scotland Group (RBS) underwrote more loans than any institution to Dubai World, arranging $2.3 billion, or 17%, of Dubai World loans since January 2007. [3] It seems a good thing that RBS has joined the UK government’s Asset Protection Scheme after all.

Lloyds Banking Group also made an regulatory announcement this afternoon. The bank said that the new convertible bonds, issued as part of the restructuring package, will convert to equity at a price of £0.592093 per share, yet the conversion would only take place if its core tier one capital fell below 5%.

The bank’s tier one capital is, in my opinion, unlikely to fall to this level as things stand. We still need to find out whether Lloyds has any exposure to Dubai, however. If it does, we would then need to assess whether the exposure is high enough to cause a material impact on the bank’s balance sheet should Dubai default on its debt obligations.

There were also few director deals in London today. The Chairman of Computacenter Greg Lock today purchased 50,000 shares in the company at a price of 249p a share, raising his holding in Computacenter to 350,000 shares, representing 0.228% of the issued share capital.

Meanwhile, Timothy How, a director of DSG International, bought 80,000 shares in the company at a price of 35.58p per share.

Elsewhere, it is also rumoured that there are prospective buyers for LGC, Britain’s largest private forensic science company that belongs to LGV Capital, the private equity unit of insurer Legal & General Group. Unidentified sources have told Reuters that LGC may be sold for around £200 million ($328 million). Shares in Legal & General were 3.5% higher at 81.25p.

Source: [1] Bloomberg News (27 November 2009)
Source: [2]Thompson Reuters (27 November 2009)
Source: [3] Bloomberg News (27 November 2009)

By Anthony Grech, Research Analyst, IG Index.

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