So far it the major stock markets have shrugged off the de facto Dubai default. In the greater scheme of things, Dubai is a tiny pimple on the nether regions of global finance. It is so small, it really doesn’t bear much scrutiny.
The only role it can aspire to play, other than being a showcase of unfathomable gaudiness and excess, is as a ‘canary in the coal mine’. Even after the gut wrenching credit crisis, Dubai was the last place on earth that pretended to party on like it was 1999. So in this sense, it represents the last pocket of ‘irrational exuberance’ that needs to be snuffed out.
Eventually, reality did catch up with the mirage. The FTSE NASDAQ Dubai UAE 20 index topped out at 2469 in October 2009. And so far it has fallen about 43% to 1395:
I wouldn’t be surprised to see it fall to support at 940 - where it bottomed out in February 2009, a month earlier than most other international equity markets. That would mean a total decline of 62% - close to the decline in the S&P 500 during this bear market (assuming the March 2009 lows hold).
The probability of such a crash increases with every single daily drop. As prices in Dubai fall, they pressure further selling, which begets even more selling as a growing number of participants reach their pain threshold. Also, notice that the upwards trending support line has been decidedly pierced to the downside.
There is very little information out of Dubai, which isn’t surprising considering the autocratic and downright dictatorial form of government they have. So the equity markets there are flying blind at this point and prices are really the only clear message coming out. There is still a lot of hope left to be wrung out as the debt repayment deadline approaches and passes next week (December 14th).
To balance my pessimistic outlook here’s the typical money manager spin from CNBC:
In keeping with the great tradition of credit rating agencies, Moody’s has finally gotten around to closing the barn door after making sure that all the horses are over the hills and far away. They downgraded 6 Dubai government related companies and warned that further credit downgrades would be possible.
Here’s a lot more sensible analysis from Dominique Dwor-Frecaut, macro strategist at the Royal Bank of Scotland. She expects the withdrawal of liquidity to wreak havoc next year:
Before the year end, I’ll be updating my review of the global stock markets to see where we stand. Back in May it offered a vote of confidence for the young rally. Let’s see what we find now as many signs point to a tired (cyclical) bull market.
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