Liquidity Increasing In Constrained Asian Markets

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Asia has enjoyed a period of sustained growth over the last few years, but recent efforts by the U.S. Fed to wind down its tapering program and preserve the value of the dollar have begun to tighten financial markets. This was causing a mild liquidity crunch in many of the Asian countries and companies that had been relying on cheap dollars to fuel growth through low-cost loans. Now, however, money is flowing back into Asia, which could be priming the region for another cycle of expansion.

Cheap dollars also made it attractive for foreign companies to direct investments to the region, but with the dollar and U.S. stock market primed for a rebound many of said countries began to shift their focus back to the U.S. Now, however, dropping treasury bonds and a rough stretch of time in U.S. stock markets are sending money back abroad once again. Up until recent weeks, money was flowing out of Asian markets but through April capital flows have once again reversed. In fact, Asian markets lost nearly $25 billion dollars in stocks and bond funds.

Bond purchasers looking for strong returns in Asian markets

Traders looking for strong returns on their bonds have been fleeing the dollar, which is seeing bond rates fall as low as 2.65%. Bonds in Asia are offering stronger returns, though risks are perceived to be higher.

Stock markets in Asia are also looking more attractive even amid concerns of a region-wide slowdown. China, for example, has all but admitted that it will be difficult to hit its growth target of 7.5% this year amid slowing exports and lackluster domestic consumption. Despite weak conditions, the Hang Seng China Enterprises Index, which is a Hong Kong listing on mainland stocks, has recorded four straight weeks of growth.

Developed markets hurting

Despite the fact that advanced economies such as the United States and Japan appear to be on more solid footing than they were a year ago, stock markets in said countries have been suffering. Japan’s Nikkei 225 has plummeted 15% through the year, while U.S. stock indexes have been dropping over the last month. European stock indexes have been suffering from rather violent up and down swings through the year and have joined in the recent cool off.

Instead of suggesting deep systemic problems, it’s possible that stock markets are merely readjusting following a period of strong exuberance. Traders may have over-anticipated the effects of the wind down of the United States’ quantitative easing program. Of course, if indicators in said developed countries turn south, the cool off could become more serious.

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