Dubai this week handed investors a prospectus for plans to borrow as much as $6.5 billion -- $4 billion through conventional bonds, and $2.5 billion through Islamic bonds, or sukuk. Follow the links to learn more.

Not a good day for the markets. The flight from risk appears to be underway, but it seems to be a flight from stagflation fear, as US Treasuries actually fell yesterday alongside stocks even as the dollar eked out some gains. But inflation risks are now gaining attention as a weaker dollar helps US petrol prices rise and US savings rates fall instead of rising as they should be doing during a recovery.

MEED is reporting further details of Dubai International Capital's new 2-year, $550 million syndicated loan.

The bill for the rally may have arrived. Much of the run-up in stocks has been based on expectations that US stimulus would push down the dollar and inflate assets. This remains in place, but another powerful force behind the rally has been optimism about a global recovery, led by Asia. Naysayers like Nouriel Roubini have warned that Asia's recovery depends on exports to the US and that the US recovery is going to be so weak it may be hard to notice at all without time-lapse photography. We're now in the Q3 earnings season, which will give us the first year of earnings since the crisis started. If earnings disappoint, particularly among those companies that should be raking it in from any real Asian recovery, like Exxon Mobil, then the rally may be toast. There is also increasing noise about when the Fed will begin to take the punch bowl away. Most economists and analysts believe that won't be for some time, like maybe the middle of next year. Banks after all are still failing, and Nomura economist Richard Koo believes that if the US takes its foot of the accelerator, it could be 1937 all over again.

Dubai is joining the stampede to issue bonds to feed the risk-appetite feeding frenzy. But the stampede may be turning into a race: there are tentative signs that US interest rates may be headed upward. This could raise borrowing costs for emerging-market issuers like Dubai. Right now, with its own CDS spreads back down to 290 bps after rising into the 1000 bps range, Dubai remains one of the six riskiest sovereign issuers, according to rankings by CMA. But low US benchmark rates, courtesy of the Fed's zero interest rate policy, or ZIRP, mean that even with a 290 bps spread of US dollar Libor, you can still borrow below 4 per cent. Some are predicting that Dubai might have to price its bonds at 6 per cent or above, but this seems excessive considering the bonds will have implicit backing of the Central Bank and, if legislation guaranteeing all Govenment bonds is signed by the President, explicit backing of the UAE and by extension, AA-rated Abu Dhabi. Abu Dhabi paid in the neighbourhood of 4 per cent earlier this year, but spreads have come down significantly since then.

Stronger data out of the US is convincing sceptics that a real recovery is underway. If nothing else, the dollar's continued decline is accomplishing what America's biggest suppliers and creditors fear -- that the US is trying to inflate its way out of debt and boosting its own export competitiveness. Everyone knows a weaker dollar is the only way to eliminate the persistent trade surpluses that have created the destabilising imbalances that set the stage for the crisis, but few are willing to accept the weak dollar solution, not the Chinese -- who've kept the yuan static against the dollar throughout -- nor the Europeans, who are now squawking about the Euro's sudden strength.

This is the sort of thing I'm talking about: sugar-coating the recovery for investors. I had to rub my eyes just to make sure I hadn't misread this one: a report on China from Merrill Lynch that shouts "Trade growth jumped in September," only to explain that "Contractions (in year-on-year terms) of both exports and imports narrowed to 15.2% and 3.5% in September." So trade did not jump. In fact it shrank. Exports out of China appear to have bottomed out, but are still declining!

It looks as if this week will begin with markets in the "risk-on" position. Strategists believe that the inflation doves have the con at the Fed, meaning the printing presses will keep running. That means more pressure on the dollar and more money pushing up emerging-market assets, particularly those in countries with strong current account surpluses, low export gearing, and strong potential for currency upside. Australia comes to mind immediately.

In this week's column, I explored the dramatically shrinking amount of capital being raised by Gulf companies and governments. The amount of capital raised in the region in the first 9 months of this year was down by 67 per cent from the same period of 2008 and in the UAE, that was down by 73 per cent, according to statistics obtained from Thomson Reuters. Of this much diminished pie, bonds are taking up a much larger portion, rising from 11 per cent in the GCC last year to 53 per cent so far in 2009. In the UAE, the shift is just as dramatic, with bonds rising from 17 per cent of the total to 67 per cent.

Here are some graphs that illustrate the statistics:

The case for emerging-market assets remains strong. Bulls like EM as leading the way out of the global recession with a V-shaped recovery. Bears like EM as a hedge against dollar inflation. Which camp is driving prices is hard to tell when you've got rallies in Asian stocks, US Treasuries and gold at the same time. Gauging which days are "risk-on", and which are "risk-off" is getting tougher. Merrill Lynch FX strategist Steven Pearson suggests it's as simple as watching the day's moves in the US dollar. If the dollar is diving, as it has been in recent days, it's risk-on, baby! And investors are taking cheap, depreciating dollars and plowing them into anything they can get their hands on that isn't dollar-dependent.