Volatile markets generate little cheer for Asia's trading desks

Sun Jul 21, 2013 5:50pm EDT
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By Vikram Subhedar and Saikat Chatterjee

HONG KONG (Reuters) - Trading desks normally love volatility but Asian operations have found little joy in recent wild swings, undercut by investors' brutal reassessment of the region's prospects as they prepare for the end of unlimited cheap cash from the United States.

The massive monetary stimulus from the U.S. Federal Reserve and other major central banks of recent years has cheaply funded investments in emerging markets, such as high-yield bonds.

But with the Fed saying it may be time to start pulling back and China and India slowing significantly, investors don't want to be left holding high-risk assets as their funding costs rise.

"With the markets under pressure now, that underlying liquidity has vanished," said the head of Asian fixed income trading at a U.S. bank in Hong Kong. "So to get into emerging markets now is a bit like catching a falling knife."

A credit crunch in China last month, the Indian rupee's plunge to record lows and a strengthening U.S. dollar have added to the reluctance to buy in, and trading volumes are falling.

"We are hardly seeing any inflows on the institutional side on the FX or the fixed income space in Asia," the trader said.

"Most clients that we talk to are sidelined and waiting for a further weakening of the market."

The shrinking of the pool of money at work in Asia has hit volumes across assets even as volatility has risen, which is a worry for banks that have ramped up their regional presence as Asia drove the world economy after the global financial crisis.   Continued...

A passerby is reflected in an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo April 4, 2013. REUTERS/Yuya Shino