Investors braced for a 10 percent fall in United Arab Emirate stocks on Monday as the market reopens for the first time since Dubai called for a delay in repaying billions of dollars in debt, spooking global markets.
Asian stocks rallied, however, recouping some of last week's heavy losses after the UAE offered the region's banks emergency support and Dubai's wealthy neighbor, Abu Dhabi, said it would provide selective support to Dubai companies.
That helped ease concerns that a looming debt default by two flagship Dubai companies could trigger the kind of knock-on effect that the collapse of Lehman Brothers caused at the height of the financial crisis last year.
Investors are likely to hold on to their shares after a sharp sale last week as worries over the ripple-effect of Dubai's debt eased over the weekend, said Eddy Chen, a vice president at National Investment Trust Co Ltd in Taiwan.
There's a gradual realization that Dubai was an exceptional case and does not reflect the global economic situation.
In the Gulf, investors wanted more information about conglomerate Dubai World and its main property subsidiary Nakheel, and reassurance that close to $60 billion in debt, most of it owed to local lenders, would be repaid.
UAE markets, which open at 0600 GMT on Monday after closing for the Eid al-Adha holiday on November 26, are expected to drop by their 10 percent daily maximum, lead by builders and banks.
We are probably going to see limit down, unless some sort of clarification of a plan or anything that would alleviate investor concerns comes out in the morning, said Haissam Al Arabi, head of hedge fund Gulfmena Alternative Investments. Dubai will take Abu Dhabi down with it.
Abu Dhabi, the wealthy capital of the seven member United Arab Emirates federation, will pick and choose how to assist debt-laden neighbor, a senior Abu Dhabi official said.
We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts, he told Reuters by phone on Saturday.
The action of the UAE central bank to allay concerns by setting up an emergency liquidity facility was viewed as a necessary but limited policy response.
This is the absolute minimum they could have done and suggests they won't be making another announcement before tomorrow morning, which is a little disappointing, Raj Madha, banking analyst at EFG-Hermes, said on Sunday.
Analysts said the timing of the news on the eve of the Muslim Eid al-Adha holiday, the lack of prior communication with investors, and the scant details given on the plans has dented Dubai's credibility.
Local media, mostly owned or controlled by government-related entities or vested interests, initially ignored the gravity of the crisis and have now taken to criticizing foreign media for blowing events out of proportion.
A headline from Arabic-language daily Al-bayan on Sunday read: Dubai is exemplary for investment destinations. English-language Gulf News said: Global outcry over Dubai World restructuring is exaggerated.
Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion that was racked up in transforming itself from a sleepy fishing town to booming regional center for finance, investment and tourism.
'DUBAI DROP' OVERDONE
International banks' exposure to Dubai World could be as high as $12 billion, banking sources told Thomson Reuters LPC -- a far cry from the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have to make between 2007 and 2010 as a result of the credit crisis.
Paul Schulte, a strategist at Nomura, said Asian exposure was utterly insignificant, with Indian banks and South Korean builders among the few companies likely to take a hit.
With that in mind, investors jumped back into Asian stocks, pushing the MSCI index of Asia Pacific stocks traded outside Japan up 2.8 percent at 0330 GMT, while the Thomson Reuters index of regional shares was 2.5 percent higher.
Banks such as HSBC and Standard Chartered in Hong Kong, and Mizuho Financial and Mitsubishi UFJ Financial Group in Tokyo, led the rebound, as investors took heart from a better-than-expected showing in U.S. stocks when Wall Street after Thanksgiving holiday.
Major U.S. indexes fell 1.4 to 1.7 percent on Friday.
The market over-reacted on Friday, said Phillips Securities analyst Rock Lam.
Although Dubai World is extending its repayment period, it will not pose an impact on banks' earnings, he said.
The dollar and the yen weakened and commodity prices bounced as last week's risk aversion trades were unwound.
(For graphic of a simplified breakdown of the various holdings of Dubai World, Dubai Holding and Investment Corporation of Dubai click: http://graphics.thomsonreuters.com/119/ME_DBSTR1109.gif)
(Writing by Lincoln Feast; Editing by Tomasz Janowski)