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 The Dubai Financial Market dropped 6.1 per cent yesterday, its worst day since last November, led down by a 10 per cent fall in Emaar Properties in reaction to news about its four-way merger negotiations with Dubai Government property companies.

However, the DFM fall also came against a deteriorating outlook for global stock markets which have weakened in the past two weeks after a 13-week bear market rally. Some observers think a blow-off is now possible with stocks moving higher before succumbing to another vicious fall.

Correction overdue

But there is also an argument that a sideways consolidation or modest correction is coming, followed by another big fall in the autumn months. Insiders have been large net sellers of stocks in recent weeks suggesting that the smart money is moving out of the market.

The major macro indicators are also starting to suggest that talk of green shoots of recovery has been not only been overdone but severely premature. For example, the US Commerce Department reported last week that the household savings rate has increased to 6.9 per cent, the highest since December 1993.

Therefore, while the US Government has been injecting money into the economy through its bank bailouts and stimulus measures, the all-powerful US consumer has been withdrawing money from circulation at an even greater speed.

For an economy where 70 per cent of spending power comes from the consumer this contraction has serious implications for future demand levels. The assumption of a second half economic upturn looks increasingly doubtful, and even a 2010 recovery is beginning to look optimistic.

Stocks over-priced

What then for share prices which are now pricing in an optimistic recovery scenario? Why they have to come down of course, and as we saw in Dubai yesterday stock market adjustments are seldom delicate affairs.

Unfortunately another collapse in global financial markets has negative implications for recovery prospects in the Middle East as the DFM would instantly recognize. And indeed crude oil closed back under $70 a barrel last week, along with the first drop in the S&P 500 for five days.

Indeed, in this context the DFM slump can not be entirely put down to an adverse market reaction to the Emaar merger negotiations as globally stocks are overdue for a correction, and besides the summer sell-off before the holidays is normal.