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.
Greece, another debt worry for investors after being downgraded by Fitch Ratings, also said it was taking steps to get its financial house in order.
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 in aid, some $4.1 billion of which was to be used by state-controlled property developer Nakheel 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 0.4 percent with European stocks leading the way. The FTSEurofirst 300 gained 0.8 percent.
Other risk plays were also in evidence, with the dollar losing some of its recent strength to drop a third of a percent 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.
"In the near term, it's obviously good news because liquidity issue 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."
STIMULUS
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 December 3 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 U.S. Federal Reserve's meeting this Wednesday.
No change is expected in rates, but the language used in the statement will be devoured 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 percent to $1.4656 and the dollar slid 0.4 percent to 88.73 yen.
"The Abu Dhabi news helped risk sentiment … But we should be careful, the markets are thinning out so we could see some volatile moves," said Kasper Kirkegaard, currency strategist at Danske Markets in Copenhagen.
