World financial markets tumble

Shock waves from Dubai reverberate on Wall St. StStreet

NEW YORK (AP) — This was the sideswipe investors had feared.

The stock market is in the middle of one of the great rallies of a generation, but for weeks there has been a nagging fear that bad news was never far off. The news came from Dubai, a wealthy Middle Eastern city-state that many Americans probably couldn’t find on a map. Concerns that a government-backed investment company risked defaulting on $60 billion in debt ripped through world markets and served as a reminder of how fragile the financial system remains a year after it nearly collapsed.

The Dow Jones industrial average slumped 155 points Friday before trading ended three hours early due to the Thanksgiving holiday. The Dow fell as much as 233 points. The broad retreat from riskier assets pushed Treasury prices higher. The dollar gained against most other major currencies and commodities tumbled.

Now the question that will dog investors over the weekend is whether the markets will shrug off a financial crisis in the Middle East or seek protection in more conservative investments. That could end a rally that has seen the Dow surge 57.5 percent since March 9.

Stocks ended well off their lows but analysts cautioned that the shortened day and scarcity of traders meant the real test for the markets will come next week as traders return from long weekends.

The day’s gyrations made clear that investors who might have been buying up stock in the past eight months remain on edge about faults in the financial system and the economy.

Worries about bad debt are fresh in investors’ minds after the collapse of the U.S. brokerage Lehman Brothers in September last year kicked the U.S. economy deeper into recession overnight as banks halted lending on fears about the extent of bad loans.

The latest concern is that problems in Dubai, which has drawn wealthy tourists and investors from around the globe in the past decade with its Las Vegas-in-the-Middle East appeal, could imperil a nascent economic rebound around the world. This could happen if banks suffer big losses or confidence falters.

“The biggest risk is a domino effect,” said Kevin Shacknofsky, portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y.

The latest trouble on Wall Street comes as the U.S. kicks off the unofficial start to the holiday shopping season. Investors will be tracking news from retailers for insights into how much consumers will spend in the coming month. Consumer spending is the biggest driver of the U.S. economy.

The Dow fell 154.48, or 1.5 percent, to 10,309.92. It was the Dow’s biggest drop since Oct. 30.

The broader Standard & Poor’s 500 index fell 19.14, or 1.7 percent, to 1,091.49, and the Nasdaq composite index fell 37.61, or 1.7 percent, to 2,138.44.

For the week, the Dow slipped 0.1 percent, breaking a three-week winning streak. The S&P 500 index rose less than 0.1 percent and the Nasdaq fell 0.4 percent. Stocks are still up sharply for the month and the year.

Analysts were divided over whether Dubai’s problems meant more trouble was to come.

Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said U.S. investors were given a chance to digest the news with markets closed on Thanksgiving. Reports of Dubai’s problems surfaced during trading on Wednesday and drew little initial reaction.

“It was like we were in a coma for a day and awoke and the worst had passed,” he said.

In the past, financial time-bombs have been hard to detect. The subprime mortgage crises that helped tip the U.S. into recession began with small pops that grew louder as the extent of the problems with souring debt became clear.

Earlier this week, Dubai World, the city’s main investment arm, said it had asked creditors for a six-month freeze in repaying the debt.

Dubai, part of the United Arab Emirates, has been better known for lavish hotels, palm-shaped islands and indoor skiing, than for financial problems brought by the recession. Whether Dubai’s troubles prove to be a hiccup or something worse, investors didn’t take chances.