Dubai Default Risk Rocks Markets

As early morning shoppers are hitting stores seeking Black Friday deals, market participants are having a sale of their own on stocks as news of a potential default of Dubai World rocks the financial markets.

The U.S. equity markets are expected to open well in the red on a shortened, and likely volatile, trading day following the Thanksgiving holiday.

Shares in Asia and Europe came under heavy selling after the UAE government announced late Wednesday it would take charge of restructuring its corporate flagship, Dubai World.

The government is asking creditors to defer payments of some $20 bln in debt coming due over the next 18 months, risking the biggest sovereign default since Argentina in 2001.

The government's attempt to reschedule debt has triggered declines worldwide, particularly in banks. Among the international banks that have large exposure are the Royal Bank of Scotland (RBS), HSBC (HBC), Barclays (BCS), Lloyds Banking Group (LYG), Standard Chartered PLC and ING Groep (ING). U.S. banks, as well, as trading lower premarket on fears of exposure.

Dubai World has been a fixture of the excess, developing some of the most extravagant and lavish real estate projects over the last few years. Like how the end of easy credit hit the Middle East's trading hub, the specter of default comes as a surprise to investors who have been reassured by local officials for months.

Dubai's total liabilities are $80 bln and the cost to insure against Dubai Emirates' debt default has skyrocketed. Both Standard & Poor's and Moody's have downgraded ratings of all six government-related issuers in Dubai following the debt payment delay.

Risk went on sale as well this morning as the fallout spread. Investors sought out safety in the U.S. dollar, while commodities fell sharply. Oil futures dropped nearly 5% to roughly $74 per barrel, while gold fell 2%.

The dollar gained against major currencies with the exception of the yen, which reached a 14-year high, sparking rumors of a potential intervention.

Yields on the 10-year Treasury notes fell to 3.21%.

The Dubai debt debacle will dominate trading today, overshadowing news flowing out of the retail sector regarding Black Friday -- the first major barometer of holiday consumer spending.