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Money Returns to Asian Markets as ECB, Fed Take Easy Stance

Worries over the euro zone debt crisis and new capital requirements for European banks, which prompted a pullback in their lending capacity in Asia, contributed to an outflow of foreign funds from the region in the second half of 2011.

Trader monitors foreign exchange and the stock index at Gaitame.com, a foreign exchange trading company on November 26, 2009 in Tokyo, Japan. U.S. Dollars fell below 87 yen, lowest level in 14 years.
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Trader monitors foreign exchange and the stock index at Gaitame.com, a foreign exchange trading company on November 26, 2009 in Tokyo, Japan. U.S. Dollars fell below 87 yen, lowest level in 14 years.

However, money is returning back into emerging Asian markets, say analysts, helped by easing concerns over a funding squeeze following the announcement of liquidity measures by the European Central Bank and expectations of further stimulus by the U.S. Federal Reserve .

“The fear of a catastrophe in Europe has receded. The European Central Bank (ECB) did a very good job with their Long Term Refinancing Operation (LTRO) program that has encouraged investors to put money back into risk,” John Noonan, Senior FX Analyst at Thomson Reuters told CNBC on Monday.

In December, the ECB announced the first of two long-term refinancing operations, in which the central bank lends unlimited amounts for three years at its record-low 1 percent interest rate.

“The LTRO has basically provided this big tap of liquidity that has really smothered any concerns for the next six months,” said Arjuna Mahendran, MD & Head Investment Strategy Asia at HSBC Private Bank. “Every time there is any sort of QE, money flows into emerging markets.”

According to data from global fund tracker EPFR, emerging markets attracted fresh capital of $3.5 billion in equity funds for the week ended January 25, the highest in nearly 10 months.

Growing expectations of further quantitative easing out of the U.S., following the downbeat statement by the Fed last week, are also encouraging fund flows into Asia which will boost regional equities and currencies over the first half of the year, both Mahendra and Noonan noted.

“Europe is slowing down, that will drag U.S. growth down, and by the middle of the year the Fed will implement QE3,” adds Mahendra.

However, Russell Jones, Global Head of Fixed Income Strategy, Westpac Institutional Bank isn’t convinced that the recent rise in fund flows into Asian equities is sustainable, with continued uncertainty over the Europe’s debt situation and doubts about growth in Asia.

“I think the rally has been very good over the first 3-4 weeks of the new year, my sense is, it’s not the time to load the boat up with risk assets right now, it’s time to fade that rally,” said Jones.

“The Fed is being very generous, extraordinarily dovish, we think if anything that’s a positive for the bond market,” Jones added.