By Jeremy Gaunt, European Investment Correspondent
LONDON (Reuters) - The coming week should signal whether a year of voracious risk appetite on financial markets is going to end with a bang, a whimper or, quite possibly, a thundering great clunk.
Not only will investors have to deal with confidence-sapping fallout from Dubai's debt problems, they will also be faced with a European Central Bank that may well flag an end to its crisis-driven program of providing cheap money to banks.
Investors have long said that when central banks launch such exit strategies -- stopping the flood of money they pumped into the financial system to stop a wholesale global collapse -- assets are likely to become highly volatile.
"The ECB will have more fundamental and longer-term impact than Dubai," Emiel van den Heiligenberg, head of asset allocation at Fortis Investments in London.
There is no doubt, however, that when Dubai told creditors of its Dubai World and property group Nakheel that debt repayments will be delayed, it handed global investors a major shock.
The financial world is so intertwined that assets as diverse as European car makers and the Mexican peso have been hit by Dubai debt fears -- the former because they are part-owned by Gulf sovereign wealth funds, the latter because of the implication for banks, lending and economic recovery.
Emerging market stocks <.MSCIEF> have fallen sharply since Dubai's announcement while the dollar has rebounded, both signs of clear risk aversion from market players.
How much further this goes may depend on whether other Gulf emirates, such as cash-rich Abu Dhabi, come to the aid of over-leveraged Dubai, as many expect.
Investors will also be looking to see just who is exposed, particularly among banks. And they may wonder whether there was an over-reaction with memories still fresh about last year's Lehman Brothers collapse.
But it may also be that they have taken -- and will continue to take -- the Dubai debt crisis as an excuse to sell riskier assets that have performed stunningly well this year to book profits by year end.
"The general comment (among investment managers) is 'this is a good opportunity to lock in gains'," said Peter Lucas, investment strategist at RBC Wealth Management.
The Dubai "black swan" came waddling out of the desert just as investors were preparing to face a world where the liquidity that has driven risk appetite this year may be about to become less plentiful.
When the ECB meets on Thursday, it is expected to leave rates on hold at a record low of 1 percent. But it is also seen announcing how it plans to start pulling back supplies of cheap and generous liquidity.
It is expected to confirm that a loan of ultra-cheap 12-month funds in December will be the last of its kind and it may also announce it will cut the frequency of long-term liquidity operations next year.
While, in a sense, such a move would suggest that the bank believes the credit and economic crisis of the past few years in now under control, it is also likely to remove some of the stimulus that has been supporting riskier assets.
The cost of insuring Greek debt has been rising, for example, in what some investors see as reflecting a move away from countries with weaker fiscal conditions.
Fortis' van den Heiligenberg described this as a "roadmap" for 2010, a year in which draining liquidity will put pressure on those it has kept afloat.
He mentioned Spanish banks and Spanish real estate vehicles as examples.
"The free money has gone. These weaker layers will have to pay for the liquidity," he said.
MORE VOLATILITY AHEAD?
Up until the Dubai announcement, however, investors appeared remarkably unwilling to step back, despite worried about German banks, questions about the U.S. economy and very large gains for some assets.
This could indicate a belief that all will be well once the year is out, particularly given the possibility of substantially rising U.S. corporate earnings reports in January.
U.S. financial services firm State Street said this week that its investor confidence index had dropped for a third month running. But the index did not drop below 100, the level that would suggest risk appetite had evaporated.
The firm suggested that investors were concerned about equity valuations and were also increasingly demanding hard evidence that world economies are improving.
With that in mind, the monthly U.S. jobs data on Friday will take its usual place of honor in the investor timetable and provide some guidance.
Reuters monthly asset allocation polls, to be released on Monday, should also give some idea of how leading investors are position going in to what it likely to be a volatile few weeks before New Year.
(Additional reporting by Krista Hughes, editing by Mike Peacock)