Macroeconomic indicators from the US could spell further swings in the strength of the dollar but expectations for the banking sector are 'quite positive'.
Traders await UAE banks' earnings reports
Traders will be holding their breath in the week ahead as they await earnings reports from some of the UAE's biggest banks, alongside macroeconomic indicators from the US that could spell further swings in the strength of the dollar.
It would be the moment of truth for many investors who have built up their positions over the past three months, according to Hassan el Salah, the head of institutional sales at AlRamz Securities.
"A lot of investors have already placed their bets," Mr al Salah said. "The markets should hold on to their current levels, except in the event of any surprise.
"A lot of people were sceptical from the beginning of this rally and not a lot of people participated in it."
Many of the Emirates's largest banks will report earnings this week, with Emirates NBD, the UAE's largest bank by assets, reporting tomorrow, followed on Tuesday by First Gulf Bank and National Bank of Abu Dhabi.
Marwan Shurrab, a fund manager at Gulfmena Alternative Investments, said: "The expectations for the banking sector are quite positive, especially in Q3 and Q4. That's what we're trying to price in right now."
But Mr Shurrab said the biggest worry for analysts would be the extent of provisions for bad debts.
Fears over Dubai's fiscal stability resurfaced last week, after Morgan Stanley said that recent optimism on UAE markets "may be difficult to validate purely based on fundamentals", and speculated the current rally in stock prices might be short-lived.
There has been a remarkable rally in local stocks in the past three months, with the Dubai Financial Market General Index rising 13.88 per cent and the Abu Dhabi Securities Exchange General Index gaining 10.7 per cent.
Credit default swaps on Dubai's 10-year government bonds, which many analysts view as a reflection of underlying risks, reversed their recent downward trend last week, rising 40 basis points to 430.30.
But traders said they did not expect debt worries to rattle the markets in the short term, as many risks had now been priced in. "We're much wiser today than we were a year ago," one trader said.
Also ahead this week is a mass of economic data from the US. Speculation has been mounting all month that the US Federal Reserve will increase stimulus measures at its meeting next month, which would boost stocks in the US and weaken the dollar.
"The worse the data is, the more people are going to be convinced that more quantitative easing is coming," said one trader, who asked not to be named. Dismal results from the US might lead to further stimulus and spark a rally in UAE stocks, he said.
By contrast, good economic news could convince traders that no stimulus is needed, leading to a fall in asset prices.
Traders will be watching the US monthly consumer confidence indicators, as well as the S&P/Case-Shiller Housing Price Index, which gives an indicator of the strength of the US property market, both due to be released on Tuesday.
Earnings in the US would also demand attention, traders said. Many corporate titans, such as Ford, Coca-Cola and Dow Chemical, are due to report before the release of US GDP figures next weekend after UAE markets close.