London: Some confidence returned to financial markets at least for the short term on Monday after Abu Dhabi bailed out debt-stricken fellow emirate Dubai, sending stocks higher and weakening the dollar.
Wall Street looked set to open stronger.
Financial markets have been shaken in recent weeks by concerns over debt in Dubai, Greece and Spain, with Britain and Ireland hovering in the wings.
Dubai appeared to have dodged a bullet on Monday when Abu Dhabi gave it $10 billion (Rs46,700 crore) in aid, some $4.1 billion of which was to be used by state-controlled property developer Nakheel Pjsc to repay its maturing Islamic bond.
The money essentially will stop Nakheel from defaulting.
“The Abu Dhabi/Dubai story will lead the headlines so...the momentum today should be for more risk appetite,” said Morten Povlsen, a rates strategist at Nordea in Copenhagen.
World stocks as measured by MSCI were up 0.3% with European stocks leading the way. The FTSEurofirst 300 gained 0.6%.
Other risk plays were also in evidence, with the dollar losing some of its recent strength to drop 0.2% against a basket of currencies.
The issue before investors, however, will be whether the Dubai bailout is simply a momentary boost for risk appetite and whether the end of year caution that has been apparent the past few weeks will return.
Some of Monday’s moves, for example, were already off their highs or lows. Euro zone government bonds and treasuries were also in demand with year-end approaching.
“In the near term, it’s obviously good news because liquidity issues for Dubai has now passed in the short term,” said Ronan Carr, European equity strategist at Morgan Stanley. “But the broader issue of government finances being stretched...the risk of fiscal crisis somewhere in the world is a theme that will come and go in the next few years.”
Adding to investor debt-angst, meanwhile, is the worry about what impact the withdrawal of special liquidity programmes by central banks will have.
The European Central Bank got things under way on 3 December when it said the cost of funds at its third and final 12-month liquidity operation would be indexed to its main policy rate.
Investors are also a bit jittery about the US Federal Reserve’s meeting this Wednesday.
No change is expected in rates, but the language used in the statement will be chewed over by markets looking for signposts to the exit.
The recent jobs data—far stronger than expected, if still weak—also may prompt the Fed to consider tightening earlier that currently assumed.
Such a move could have a bigger impact on currencies that the swing away from the dollar seen on Monday after the Dubai news. Higher rates would boost the dollar.
On Monday, however, its losses were widespread. The euro rose 0.2% to $1.4647 and the dollar slid 0.6% to 88.54 yen.