Despite Dubai’s rescue, traders’ concerns over debt persist

THE news yesterday that Abu Dhabi had bailed out Dubai to the tune of $10bn gave indices across the world an extra boost. Adding to the good news in the market was Citigroup’s proposal to pay back the US government the money it owes, including an issue of $17bn of stock immediately. No doubt Citigroup was spurred on by Bank of America’s exit from the Troubled Asset Relief Programme (Tarp) a month ago, which saw strong demand from investors for the stock.

These two events combined to give a boost to risk appetite. Dubai’s wobble had seen investors’ appetite for risk plummet as they feared that the emirate’s troubles would spread across the globe, so investors in the Gulf region certainly took yesterday’s news as a positive. The Dubai stock index rose 19 per cent, while Abu Dhabi’s was up 7.93 per cent. The pound also rebounded, a sign that investors were more willing to take risky assets on board. The yen – which has been perceived as a safe-haven currency – weakened across the board.

But should contracts for difference (CFDs) traders be piling back into emerging markets and other risky assets on the back of Abu Dhabi’s actions? Perhaps. Capital Economics’ Kevin Grice points out that Dubai’s problems are a legacy of past financial excesses combined with a heavy dependence on foreign demand. This volatile cocktail is not present in any of the other major emerging markets, and so they are unlikely to suffer from the same problems as Dubai.

If you share this view, then you should look to go long in the near-term on risky assets such as equities and commodities as well as risky currencies such as the Australian dollar, the South African rand and the pound.

That said, there are still lingering concerns surrounding Dubai. As Alastair McCaig, senior derivatives broker at WorldSpreads, notes: “It may have relieved everybody that Abu Dhabi decided to put its hands in its pockets, but it raises the question as to why they weren’t willing to do it in the first place.”

Many market commentators are calling the move a political one, and many are questioning just what has Abu Dhabi got in return for its financial stimulus. Furthermore, restoring Dubai’s credibility will take far more than a substantial bailout and there is no guarantee that throwing cash at the emirate will solve its problems.

Luis Costa, emerging markets debt strategist at Commerzbank, says: “It looks like soft guarantees worked out this time around, but we still believe the ability of Dubai-related enterprises to tap the external markets with large deals (especially those without explicit guarantees by the state) will be re-adjusted going forward.”

It is not just Dubai which is raising concerns about debt. Greek prime minister George Papandreou also outlined yesterday economic policies aimed at reassuring the markets. On 8 December, ratings agency Fitch cut the country’s sovereign debt rating to BBB+ for the first time in more than 10 years, making it the only Eurozone member to be rated below an A.

The markets watched Papandreou’s comments closely for signs that his policies would establish Greece on a firmer footing but investors remained cautious and bought into German bonds, which are perceived to be safer than Greek debt.

CFD traders who think that sovereign debt concerns will periodically continue to affect riskier assets should seize dips in price as buying opportunities for short-term gains.

Dubai might have been a one-off event that has now been solved. But as Greece and the UK show, worries over countries’ public finances are far from over. Traders should make the most of what opportunities these episodes of risk aversion offer.