Market Action 27 November

Today's market action was dominated by fears about a possible default by government affiliated entities in Dubai. Markets sold off dramatically ahead of the European open with US & European stock indices down close to 4% and gold and oil down 4% and 7% respectively. Oil sold off most dramatically as it appears to leading proxy for risk assets at the current time. The simultaneous selloff in oil, gold, silver and other commodities shows that moves were entirely explained by the reversal of the carry trade into commodities as risk aversion spiked due to fears of a new financial crisis.

Oil and Gold prices declined dramatically ahead of the European market open with oil hitting $72.40 and Gold falling $50 to $1140 an ounce. Prices then stabilized and started to rebound once European markets opened. The rebound accelerated once US equity markets opened and it became clear that the S&P 500 would hold the key support level at 1083. The rebound continued most of the session with oil closing down only $2.00 and above the key $76/bbl level. Gold closed down only $14 and looked very strong technically.

Today's action was driven entirely by money flows, however the Dubai news may explain some of the relative weakness in oil prices in recent days. The Dubai news was undoubtedly widely known and expected in elite UAE circles. Elites in these circles often trade oil futures to take advantage of their inside knowledge of oil markets and they may have been selling oil futures as way to take advantage of their knowledge of impending events in Dubai.

Monday will be a critical day for both equities and oil as we will see the second order effects from Dubai's potential default. There may be contagion effects as well as write downs among already shaky European banks with exposure to Dubai. We are also likely to see government efforts to resolve the issues in Dubai and preserve stabilty. My money is on a bailout from the rest of the UAE. They have the money and a collapse of Dubai is not in anyone's interest.