* MSCI world equity index falls 1 percent on Dubai concerns
* Low-yielding yen, safe-haven government bonds in demand
* European corporate CDS spreads widen, commodities slip
By Atul Prakash
LONDON, Nov 27 (Reuters) - Dubai debt default concerns
continued to send shockwaves across the world on Friday, with
heightened risk aversion pushing global equities sharply lower
and prompting investors to take refuge in government bonds.
U.S. stocks looked set to follow Europe and Asia lower in a
shortened, post-Thanksgiving session.
The yen hit a 14-year high versus the dollar, which jumped
against most other currencies as investors slashed risk exposure
and carry trades. Japan signalled growing discomfort with the
yen's surge and suggested it would be open to a Group of Seven
joint statement on currencies to cool the rally.
Commodity prices extended previous session's steep losses,
with crude oil <CLc1> slumping 5 percent and key base metals
suffering heavy blows. Investor fears raised demand for lower
risk government debt, with euro zone government bonds futures
hitting their highest in eight months before paring gains.
The MSCI world equity index <.MIWD00000PUS> fell 1 percent
to its lowest in 2-1/2 weeks, with the benchmark on track for a
second consecutive weekly loss. The MSCI is still comfortably in
black since the start of the year however, with the index
holding gains of over 27 percent since January.
Investor appetite for risky assets fell sharply, with the
VDAX-NEW volatility index <.V1XI> gaining 4.4 percent, a surge
of 32 percent in three days. The higher the index, which is
based on sell and buy options on Frankfurt's top-30 stocks
<0#.GDAXI>, the lower the market's desire to take risk.
"The fear in the markets is that this is only the first
instance of a wave of governments with unsustainable debt to GDP
ratios that will start reporting trouble paying off their debt,"
said Christian Blaabjerg, chief equity strategist at Saxo Bank.
"Furthermore, fear is that this process will accelerate even
further when interest rates are heading north during 2010 ...
However, we expect short term that this is only a bump on the
road," he added.
Dubai, part of the oil-exporting United Arab Emirates, said
on Wednesday it would ask creditors of state-owned Dubai World
and Nakheel to agree to a standstill on billions of dollars of
debt as a first step towards restructuring. []
The news shook markets recovering from the collapse of the
U.S. housing bubble and contagion that threatened to rupture the
global financial system last year.
Nakheel's [] Islamic bond prices extended losses,
falling 30 points to a record low of 40, according to Reuters
data. []
Financial shares faced intense pressure, with DJ Stoxx
European banking index <.SX7P> falling 8.5 percent in three
sessions, because of potential exposure to any bad debt in the
Gulf. European car companies, some of which are part-owned by
sovereign wealth funds from the region, were also hit.
U.S. markets, closed on Thursday for Thanksgiving Day, were
poised to track European and Asian losses. Futures for the S&P
500 <SPc1>, Dow Jones <DJc1> and Nasdaq 100 <NDc1> fell 2.3 to 3
percent, while Japan's Nikkei <> fell 3.2 percent.
U.S. markets will close early at 1pm local time (1800 GMT).
"It's absolute paranoia. This is the last thing the market
needed in the run up to Christmas," said Manus Cranny, head of
sales at MF Global.
"It's not just the Dubai debt, investors are wondering what
other black holes there are and what the ramifications are for
global companies," he added.
YEN SURGES, BONDS CLIMB
Dubai debt concerns spurred flight to quality trades, with
core euro zone government bond prices pushing higher, hoisting
bond futures to their highest in almost eight months.
The dollar fell as far as 84.82 yen <JPY=>, its weakest
since 1995 and ever closer to its record low of 79.75, before
pulling back up to 86.43 yen. The dollar index <.DXY>, a measure
of its value against six major currencies, rose 0.7 percent
"A combination of systemic risk fears and thin market
liquidity due to the U.S. holiday season has proven to be a
combustible mix and several currencies or currency blocs are
feeling the impact," UBS currency analysts wrote in a note.
"The wider fallout has simply revealed how fragile both
markets and risk appetite still are," they said.
European corporate credit defaults swap spreads were wider,
reflecting the nervous mood. The investment-grade Markit iTraxx
Europe <ITEEU5Y=GF> was at 93.75 basis points, according to BGC
Partners, 4.25 basis points wider versus late on Thursday.
In commodities, crude oil <CLc1> fell 5 percent to trade
around $74 a barrel and copper <MCU3> and aluminium <MAL3> both
hit two-week lows. But spot gold <XAU=> retreated further from
record highs on a firmer dollar.
(Additional reporting by Jamie McGeever Simon Falush and
Natsuko Waki in London and Blaise Robinson in Paris)
(To read Reuters Global Investing Blog click on
http://blogs.reuters.com/globalinvesting; for the MacroScope
Blog click on http://blogs.reuters.com/macroscope; for Hedge
Hub click on http://blogs.reuters.com/hedgehub)
((atul.prakash@reuters.com; +44 20 7542 6189; Reuters
Messaging: atul.prakash.reuters.com@reuters.net))
