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from Eric Burroughs:

Don’t fret about EM outflows

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There’s a lot of excitement around the sharp outflows seen from emerging markets in the latest figures from EPFR Global. But this story is getting a little overplayed. Asian central banks have heard the message on the need to tighten policy, with Bank Indonesia following the Bank of Korea in surprising with a rate hike in the past few weeks. The positive response to the BI rate increase, with the rupiah rising and local bond yields dropping, show that the central bank showed the inflation-fighting resolve that investors were looking for, even if inflation is being exacerbated by food price run-ups beyond the control of monetary policy.

Higher short-term rates are inevitable, and SE Asian yield curves/swap curves have more room to flatten. Just look at how South Korea's swap curve has flattened like mad since the Bank of Korea has appeared to become more aggressive than anyone expected (let's see at this week's policy meeting). At the same time, stronger currencies will be part of any inflation-fighting response to keep from raising rates too much and attracting more hot money – yes, hot money. If anything the U.S. and euro zone markets have gotten a little too excited about higher rates, while some EM markets – look at the Philippines –  still offer chunky real yields, and those real yields are not even close to being as negative as they were during the 2008 commodities freakout. PIMCO’s Bill Gross last week reiterated the biggest bond fund’s support for EM bonds in decrying the “devil’s haircut” of near zero U.S. five-year real yields.

SE Asia IRS curves

On the outflows from emerging markets, the $7 billion departure from global emerging market equity funds is certainly headline grabbing, and Asia suffered the biggest weekly outflows in three years. But this pales with the inflows of the past two years. Some of this money is heading back into economies with quickening growth and low inflation like the United States and even Japan. The broad short-covering in euro assets has boosted inflows into the equity markets of Spain and Italy. Some of EPFR’s calculations may be exaggerated due to the selling by U.S.-based ETF funds, which EPFR uses as a basis for making broader estimates of fund flow shifts. For example, the iShares MSCI Indonesia fund saw its total assets drop by a third to $195 million at the end of January from a month earlier when the market was near its peak. Yet this ETF’s assets make up less than 1 percent of the Jakarta Composite’s total market cap. Oddly the fund flow out of Asia happened during what was otherwise a pretty benign week for even the weak Southeast Asian markets: all posted gains and surged into the Lunar New Year holidays, and foreign investors were net buyers in Indian shares on Friday even as the selloff resumed.

In Southeast Asia, the most susceptible to supply-push food inflation, the initial reaction has hit and faded. Some of these equity markets still carry relatively high valuations, and the shake-out may not be over. Still, monetary policy can do little here but is starting to respond to overly loose conditions: BI acknowledged that the rupiah “sustained some pressure from capital outflows. a development sparked among others by market jitters over inflationary pressure" and intervened against the currency’s drop. That means higher rates, stronger currencies – and likely ongoing inflows attracted to these real yields in what is still a low-yielding world. Keep in mind that major bond markets will be an ongoing source of volatility and higher long-term yields. This is going to be a year of interest rate volatility as the global recovery morphs into an expansion.

from Davos Notebook:

Will Goldman’s new BRICwork stand up?

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RTXWLHHJim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

from Photographers' Blog:

Fighters in the ring of the law

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A lawmaker (C) from opposition parties climbs onto the parliament chairman's seat as they scuffle with lawmakers (L) of the ruling Grand National Party to prevent them from passing new bills including the new year's budget bill at the National Assembly plenary session hall in Seoul December 8, 2010.  REUTERS/Jo Yong-Hak

As the year winds down in Seoul, highly-educated fighters dressed in business attire gather for a dramatic showdown. A sky-blue colored dome theater is the venue, and this year, it was again prepared for the upcoming event. Chairs, tables and other office furniture are stacked up on the floor to block people from entering rooms. Police officers stand guard as they surround the domed theater to prepare for any emergency situations. There are ambulances and medics. All entrances to the theater are closed, with tight security allowing only those with prior authorization to enter.

Police officers stand guard in front of the National Assembly in Seoul December 8, 2010, while lawmakers and their aides from the ruling party and the opposition party scuffle.  REUTERS/Jo Yong-Hak

A member of the main opposition Democratic Party (DP) makes his way past a barricade of furniture, created by his party to block lawmakers of the ruling Grand National Party and their aides, near an entrance of the main conference hall of parliament in Seoul December 8, 2010.  REUTERS/Jo Yong-Hak

The match begins. Hundreds of people, who don't look like mixed martial arts fighters, gather in front of the gate of the main event room. They are defenders. They discuss and plan their strategies. Chanting “Keep the position," they form scrimmages. The opponent’s fighters roll up into the hall. The offenders also make a plan on how to break through defenders’ scrimmages. They stand ready to rush. Somebody from the attackers shouts “Let’s go.” All of the offenders including dozens of women make a dash. There’s pushing and shoving. The hall is filled with screams and shouts. Camera flashes are fired at them. It’s like a red carpet ceremony. Some fighters fall and collapse. One wounded person cries with pains. Immediately medics come and take her to a hospital.

from Russell Boyce:

Asia – A Week in Pictures 12 December 2010

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This week the blog should be called A Week (and a few extra hours ) in Pictures as I wanted to share a couple of images that came in late last Sunday and evaded my net as I trawled through the file. Both are from Thailand and both were shot by Sukree Sukplang. The first is a strong portrait of Thai King Bhumibol Adulyadej as he leaves hospital in a wheelchair to attend a ceremony to celebrate his 83rd birthday. The picture seems to me to mirror the respect that the Thai people have for their King. What makes me think this I am not sure; maybe its the side light which creates studio-like modelling on the king's face highlighting every detail of his appearance, the crispness of the clothes, the beauty of the ceremonial medals and the rich colour of the royal sash. Or maybe it's just the way he is looking back into the lens, his eyes full of dignity and determination.

THAILAND/

 Thailand's King Bhumibol Adulyadej leaves the Siriraj Hospital for a ceremony at the Grand Palace in Bangkok December 5, 2010. King Bhumibol celebrates his 83rd birthday on Sunday.   REUTERS/Sukree Sukplang

from Reuters Soccer Blog:

FIFA’s World Cup decision day — live

We'll be following all the presentations and the vote itself as FIFA's executive committee decides on the hosts for the 2018 and 2022 World Cups.

Spain/Portugal, Russia, England and Netherlands/Belgium are the four rival bids for 2018, while Australia, South Korea, Qatar, United States and Japan battle it out for 2022, with the vote to come on Thursday.

from Andrew Marshall:

Risks to watch in Asia: Country guides

For Reuters analysis of risks to watch in Asian countries, kept updated in real time and with graphics and video, click on the links below.

AustraliaChinaIndiaIndonesia/

JapanMalaysiaMongoliaNew Zealand

PakistanPhilippinesSingapore/South Korea

Sri LankaTaiwanThailandVietnam

from Breakingviews:

Lone Star chalks up painful success in Korea

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

HONG KONG -- It is seven years since Lone Star bought into Korea Exchange Bank, and four years since the U.S. distressed-asset fund started trying to get out. Lone Star has finally agreed to sell its majority stake in the lender to domestic rival Hana Bank. The sizeable returns it has made explain why buyout groups like Blackstone and KKR are interested in South Korea, although Lone Star itself may not be rushing back.

from Russell Boyce:

Asia – A Week in Pictures 28 November 2010

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I was listening to a radio programme about the history of military music (please bear with me) and a woman recounted a story about the first time she heard the "Last Post" being played at the Cenotaph in London on Remembrance Sunday. The woman (sadly I don't remember her name), said that what really struck her was that after the moment of total silence was broken by the first notes of the Last Post she knew that every one of the thousands of people standing in Whitehall would be sharing the same thought - that of someone who they had loved and lost. Three stories this week put me in mind of this woman as I looked at images of people grieving for lost ones. The difference being that for each person lost the world was watching their story albeit only momentarily; the crushed people in Cambodia, the miners in New Zealand and the four people killed by the shelling by North Korea of the tiny island of Yeonpyeong.

CAMBODIA STAMPEDE/

People are crushed in a stampede on a bridge in Phnom Penh November 23, 2010. The stampede killed at least 339 people late on Monday and wounded nearly as many after thousands panicked on the last day of a water festival, authorities and state media said. REUTERS/Stringer

from Tales from the Trail:

Washington Extra – Happy Thanksgiving

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dinnerHappy Thanksgiving! Washington Extra will return on Monday.

Here are our top stories from Washington today…

U.S. vows unified response to North Korea, eyes restraint

The U.S. urged restraint following a North Korean artillery attack on South Korea and vowed to forge a "measured and unified" response with major powers including China.

For more of this story by Phil Stewart and Andrew Quinn, read here.

N.Korea pulls U.S. back to a "land of lousy options"

North Korea's artillery attack on South Korea poses the second test in three days of Washington's vow that it will not reward what it deems bad behavior with diplomatic gestures, and underscores that options are limited without serious help from China.

from Gregg Easterbrook:

Only the Koreans can end their conflict

KOREA/

For a generation, the arc of international events has been mainly positive -- the Cold War concluded, the Germanys reunited, apartheid is over. But a few conflicts refuse to end, and one became worse today as North Korea and South Korea exchanged artillery fire, killing two South Korean soldiers. It’s not yet clear how the incident began. Presumably the United States, which has substantial forces in South Korea, Japan and Guam, is at the moment watching closely.

South Korea is prosperous, reasonably free, a budding democracy, and supported by the most powerful government on earth. North Korea is impoverished, repressed and alone. Nearly all North Koreans would benefit immensely if the wall separating their country and South Korea was the world’s next wall to tumble. So why does the conflict between these two states refuse to end?

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