Home > News & Commentary > Dubai World Debt Crises: How Far Will the Damage Go Around the World? (EEM, UUP, UDN, SPY, IVV, USO, OIL)

Dubai World Debt Crises: How Far Will the Damage Go Around the World? (EEM, UUP, UDN, SPY, IVV, USO, OIL)

If recent history has taught us anything (Argentina, Brazil, Mexico, Thailand, Malaysia etc.), it is that events like the recent technical default of Dubai World (owned by Nakheel) are not things that go away quickly and without widespread pain. Aside from the high-level macroeconomic effects involving the foreign exchange markets and capital outflows, there is a huge technical implication here (not to mention the damage this could do to other middle eastern and emerging markets economies and the associated moral hazard implications).

An extremely disproportionate amount of the market is short the dollar and an event like this could be exactly the kind of thing that would break down the trade and have huge implications on the equity markets, especially in the US. The S&P 500 has been extremely correlated to the movement of the US Dollar of late and a rise in the Dollar would very likely cause a drop in the market. There is also a possibility that the increased strain on budgets in the United Arab Emirates could put pressure on the price of oil as they consider increasing output for additional revenue.

A very big thing to watch will be the market’s reaction and perception to this news over the next couple of weeks as volume comes back in following the Thanksgiving holiday. It will also be very interesting to see how money managers will be reallocating to reposition themselves for 2010. Will the chase for performance continue or turn into a race for the exits?

– Michael J. Burns

Disclosure: Long EEM, ILF, IVV, GXC, COP, CVX, several foreign stocks and foreign oriented mutual funds

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