Regional markets are braced for any signs of fallout from the start of US$85 billion (Dh312.2bn) in government spending cuts that threaten to kick off a decade-long wave of belt-tightening that risks curbing economic growth in the United States this year.
The across-the-board cuts, known as sequestration, were intended to be so onerous that neither congress nor the president, Barack Obama, would let them occur and would come up with a plan to replace them. Instead, Democrats and Republicans have deadlocked on an alternative.
Mr Obama insists that any plan must include new tax revenue, but Republicans, led by the house speaker John Boehner, reject that approach. The cuts under the law total $1.2 trillion over nine years. Of that, $85bn comes out of the budget for the remaining seven months of this fiscal year.
Economists have said the cuts may trim economic growth by as much as 0.7 per cent this year. So far investors have signalled they are not concerned about the impact on the $15.8tn US economy.
The Standard & Poor's 500 Index has risen 6.4 per cent this year and the dollar led gains in world markets last month.
The S&P 500 gained 0.2 per cent to 1,518.20 on Friday in New York trading, after dropping as much as 0.9 per cent earlier as consumer confidence increased and manufacturing grew at the fastest pace since June 2011. The Dollar Index, which tracks the currency against six US trading partners, rose 0.4 per cent. Fund managers will be looking to US markets tomorrow to determine the reaction from local equity investors. "It depends on how resilient the US market is to this event," said Sebastien Henin, a portfolio manager at The National Investor. "If there is a big US equity correction, there will be a risk of contagion and we will suffer. It's not really positive - if tomorrow you lose the support of the US government as a key actor in the economy, which is not in a weak mode, but still fragile."
However, this region may be insulated from any negative impact from a slowdown in growth in the world's largest economy.
"There will be some concerns, but that impact will be limited, because the UAE economy is really strong," said Fathi Ben Grira, the chief executive of Mena Corp, an investment company in Abu Dhabi.
The performance of shares on the stock market have been based on the performance of the local economy and its companies, Mr Ben Grira said.
"The European debt crisis, which was the subject of headlines last year, didn't affect Gulf economies that much. People are more concerned about more direct news on Arabtec or Emaar than spending cuts in the US."
Gaurav Kashyap, the head of the Dubai Multi Commodities Centre desk at Alpari, said that investor sentiment remained weak in a time of political crisis as seen by the recent Italian elections and the debt ceiling talks and "this week was no different".
"Higher yielding assets sold off across the board as money flowed into safer yielding assets such as the US dollar and US Treasuries."
"As Obama signs up to $85bn in spending cuts one is left to wonder what impact will it have on the prospects of a US recovery? Contrary to common belief, the cuts will have an immediate short-term impact on growth prospects but the sequester will not be as vicious as most media outlets portray it to be. If the full effects of the sequester are felt, up to 700,000 US jobs will be lost through 2014 and a staggering 0.7 per cent will be cut from the US GDP, which is already placed at an anaemic 2.6 per cent," Mr Kashyap said.
Treasury 10-year note yields slid the most since August.
"There's a lot of paralysis going on in DC," George Goncalves, the head of interest-rate strategy at the primary dealer Nomura, said. "It's not clear yet on how it's going to go, so people are buying Treasuries first and asking questions later."
* With Bloomberg News