Middle East markets are expected to benefit from a minor boost in the coming week as investors position portfolios ahead of fourth-quarter results. Saudi companies are expected to start releasing their corporate earnings from January 2.
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"Everyone is eyeing the corporate results," said Hesham Tuffaha, the head of asset management at Bakheet Investment Group, based in Riyadh.
"If the macro picture is OK in terms of what is happening abroad in the US and Europe, the corporate results should support the market."
But despite the recent economic data that suggests the US economy is on the right track to recovery, Europe's sovereign debt crisis is troubling investors and weighing on the market.
Gulf markets mostly declined last week, with Abu Dhabi and Dubai the most affected, down more than 2 per cent, after the index benchmarker MSCI postponed a decision to upgrade the UAE and Qatar to "emerging-markets" status. Both countries are classified as "frontier markets".
"The UAE picture still has not fully recovered, and the lack of liquidity has made the market very vulnerable in the event of bad news," Mr Tuffaha said.
"Qatar's marker, however, was not affected by the MSCI decision."
Oman's MSM 30 Index lost 1.3 per cent to 5,635.66. Bahrain's measure lost 0.9 per cent to 1,133.61. Kuwait's index lost 0.6 per cent to 5,794.30.
In the US, the broad S&P 500 index broke through its 200-day moving average on Friday after turning positive for the year as a four-day rally lifted stocks following a spell of better-than-expected economic data. At Friday's close, the S&P 500 was up 0.6 per cent for the year.
Many market participants are reluctant to believe in a "Santa Claus rally" this year, which refers to stocks' seasonal tendency to gain in the final five trading days of the year and first two trading days of the new year.
Warnings from major credit rating agencies on a potential downgrade of several European nations have kept investors on edge. After Standard & Poor's surprised financial markets back in August with a downgrade of the US"AAA" credit rating on a Friday evening, investors worry a similar move could come at any time - even between Christmas and New Year's.
But the absence of European sovereign bond auctions for the next two weeks could lend support to stocks.
"The fact that there won't be a [European] bond auction until the second week of January, that takes away some spotlight from Europe, at least for a little while," said JJ Kinahan, the TD Ameritrade chief derivatives strategist.
"Unless we get earth-shattering news, the S&P could go up to [the] 1,300 levels," he said.
The S&P 500 closed on Friday at 1,265.33.
The correlation between US stocks and European sovereign bond yields has been high, especially the link with Spanish, Italian and German bonds. A poor bond auction in any one of these countries could trigger an instant sell-off in the US stock market.
What happens this week is important as it sets a tone for the coming year.
"If Santa should fail to call, bears may come to Broad & Wall," so goes the Wall Street adage, according to the Stock Trader's Almanac.
Ari Wald, a technical strategist at Brown Brothers Harriman, said the key level on the S&P 500 to watch was 1,260, which is a resistance from the index's downward sloping 200-day moving average and the downtrend connecting its October and December peaks.
"A breakout above this supply would argue for continued seasonal strength through the first quarter of 2012," Mr Wald said.
He also noted that 1,200 demonstrated support from the index's downward 100-day moving average and the uptrend connecting its October and November lows.
"A breach of this demand could stir additional technical selling to 1,130-1,150 intermediate-term support," Mr Wald said.
With many investors absent until the start of the year, trading volume is expected to be light, creating more volatility.
* with Reuters