Dubai Finds A White Knight, Banks Stocks to Rebound?

The US financial markets will open tomorrow amidst a flurry of incoming data. First, investors will seek to understand the sales numbers from Black Friday, the unofficial start of the holiday shopping season. Next on their plate will be dealing with Dubai – understanding how many banks are exposed to their debt, and what the ramifications would be of a collapse.

News broke last week that Dubai’s investment arm, the Dubai World Fund, could default on as much as $60 billion in debt. This news sent markets reeling, with a US broad market sell off on Friday, once markets reopened. As analysts learned that US banks had relatively limited exposure to the problems in the city-state, Wall Street regained some ground late in the day, and bank stocks began to rebound.

Over the weekend, Dubai’s leaders paid an official visit to Abu Dhabi, hoping to find a white knight. Although the details of the meeting have not been fully released, the initial outlook is positive.

Facing a potential collapse of confidence in the gulf region, the UAE is taking actions in an attempt to stabilize the system and restore order. In a statement Sunday, the UAE’s central bank said it had sent notice to Emirati banks and foreign banks with branches in the country making clear they would have access to “a special additional liquidity facility.” The UAE’s immediate priority was to avert a run on banks from panicked depositors. Although this scenario is unlikely, it also brought another topic to light: cheap funds. Global investors can take solace in the country’s actions, as the government can use it’s oil money to limit the fallout from its indebted emirate’s woes.

Investors now have some reassurance from today’s news, that the UAE’s central bank will offer additional liquidity to banks, a move designed to keep credit markets from freezing up.

Jeff Mortimer, Chief Investment Officer at Charles Schwab commented, “Markets were getting a bit complacent. This is a wake-up call, the economic recovery is going to be choppy and uneven.”

Alan Gayle, Senior Investment strategist for RidgeWorth Investments added, “The Dubai incident raises the intensity of the numbers. Weak economic data on top of renewed signs credit markets haven’t fully recovered could be enough to send the market lower and set the tone for December trading.”

The central bank’s announcement Sunday is the latest indication that Abu Dhabi will not allow its neighbor to derail after an astounding decade of economic growth. The funds will be offered at a half-percentage point, above the Emirates interbank offered rate. The action may also be aimed at mitigating any negative fallout on the country as a whole, and prevent Abu Dhabi from being tainted by the pessimism that could plague Dubai for years.