Traders are preparing for a tense earnings season, with many expecting to spend the week ahead with half an eye fixed on political bargaining in the US.
Many of the UAE's biggest companies, including National Bank of Abu Dhabi, Emaar Properties and Tamweel, are expected to report earnings this week.
However, negotiations as the US approaches its federal debt limit will probably remain in the background throughout the week. An agreement on the US debt ceiling needs to be reached by Friday so any necessary legislation can be passed in time, Bloomberg News reported this month.
"The earnings will probably be more predictable," said Jarmo Kotilaine, the chief economist at National Commercial Bank. "On the one hand, we've already seen signs of what to expect from Saudi Arabia and elsewhere in the region, and people have a fairly reasonable sense of where things are headed."
On the other hand, the debt ceiling negotiations would contribute to a growing sense of anxiety among ratings agencies, he added.
Ratings agencies are becoming increasingly unnerved over the congressional standoff over the US debt ceiling, currently US$14.3 trillion. Moody's Investors Service last week became the second ratings agency to alert markets that it was reviewing the US for a possible downgrade, following Standard & Poor's in April.
However, analysts are divided on what the effect of a possible downgrade might be.
"If a downgrade does occur, we doubt it will trigger widespread panic selling of treasuries [US government bonds], provided bondholders continue to get paid and the government does not default," Capital Economics wrote in a research note.
"The outcome might be very different if, in the unlikely event, the government does actually default and this obliges some investors to liquidate their holdings of treasuries for regulatory reasons," the note added. "But even then, the impact might be short-lived and less than some fear, as the loss to bondholders would probably be small."
On local markets, the start of earnings season is likely to provide a catalyst for markets, although stocks have shown little signs of stirring so far.
First Gulf Bank, the first bank to report earnings last week, beat analysts' estimates because of lower-than-expected provisioning and an ability to sustain its margins in spite of efforts by the Central Bank to lower fees and commissions charged by lenders.
The lack of a surprise rise in bad debts gave reassurance to investors in other UAE banks, many of which are expected to struggle with the aftermath of debt restructurings at some of Dubai's government-related entities.
"UAE banks are yet to experience the peak in their [non-performing loans] to 8.4 per cent, on our estimates for 2011 and will have to adjust to stricter regulatory measures, mainly on consumer lending and fees," analysts at Credit Suisse wrote in a recent research report.
Traders are also optimistic about property companies that are expected to report earnings this week, with any negative earnings likely to be balanced by expectations of a boost from new extended regulations on visas for foreign purchasers.
Earlier this month, the UAE announced a move to lengthen visas from six months to three years for international buyers of properties worth more than Dh1 million.
This was a significant boost for the fundamentals of the entire local economy, said Yazan Abdeen, a fund manager at ING Investment Management.
The move would vastly broaden international demand for properties, and so lead to potential gains for the banks and mortgage lenders in the months ahead. "This changes the name of the game," he said.
Outside the region, flagging US demand, euro-zone debt worries, and efforts by emerging market economies to combat inflation would continue to be the biggest macroeconomic concerns in the weeks ahead, according to a recent research note from Goldman Sachs.
"The biggest issue probably still relates to where the underlying pace of growth in the US will settle, and how much of the recent slowing is transitory," Goldman analysts wrote.
"We are already beginning to see some of the temporary pressures reverse and we expect growth to pick up in the near term."
The Saudi Tadawul All-Share Index rose 0.22 per cent to 6523.01 in trading yesterday.