GLOBAL MARKETS - Shares slip on Dubai woes, bonds in demand

By Atul Prakash

LONDON (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 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 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 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, 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.