MacroScope

Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.

The assumption was that the Bank of Japan's huge money-printing campaign would push Japanese retail and institutional investors out in search of yield.  Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result.  But almost a month after the BOJ announced its plans, the cash has not yet arrived.

EM investors, who seem to have been banking the most on the arrival of Japanese cash, may be forgiven for feeling a tad nervous. Data from EPFR Global shows no notable pick-up in flows to EM bond funds while cash continues to flee EM equities ($2 billion left last week).

But first, some good news. Retail investors are demonstrating some interest in emerging assets. Barclays says launches of toshin or investment trusts last week garnered $2 billion in subscriptions, with a Pacific Rim equities fund, partly geared to Asia, receiving $1.2 billion.  The previous week saw a $500 million ASEAN fund while an emerging equities toshin started in March took in $1.6 billion. There has also been net new uridashi bond issuance in the Mexican, Brazilian, Turkish and Russian currencies over the past few weeks, Barclays data shows.

The bad news is that Japanese  funds and insurers -- and that's where the big money is -- have steered clear of emerging markets, and indeed foreign assets so far.   Barclays writes that could be bad news for markets such as Hungary and South Africa, which have poor fundamentals and have benefited from talk of Japanese cash:

Barclays was fined a record $450 million last month by U.S. and UK authorities for manipulating the London Interbank Offered Rate, or Libor, the interest rate that underpins transactions worth trillions of dollars worldwide, between 2005 and 2009.  More than a dozen banks are expected to be drawn into the scandal, which is being probed by authorities in North America, Europe and Japan.

Below is the fascinating account of a former bank staff who worked alongside money market traders on just how it all went down:

Going back a step … and in many industries still today, there is this truly working concept which is my word is my bond. And that’s how the City used to function before, a long time ago, and in many things, up until very recently.

After financial firms slashed hundreds of thousands of jobs in 2007 and 2008, the bloodletting slowed in 2009 as major banks rebounded from the financial crisis. Even though firms like Goldman Sachs Group Inc and JPMorgan Chase & Co reported billions of dollars in profit, they still did not announce major hiring initiatives.

Recession layoffs Headcount (end 2008) Headcount (end 2009) Bank of America 45,000 240,202 283,717* Citigroup 75,000 323,000 265,000 Goldman Sachs 4,800 34,500 32,500 J.P. Morgan 23,700 224,961 222,316 Morgan Stanley 8,680 45,295 61,388* UBS 19,700 77,783 65,233 Credit Suisse 7,320 47,800 47,600 Barclays 9,050 152,800 144,200 Deutsche Bank 1,380 80,456 77,053 Santander 2,600 170,961 169,460

* Includes additional employees from Morgan Stanley Smith Barney merger and Bank of America’s merger with Merrill Lynch, both of which were completed in 2009 (Steve Eder and Steve Slater)

Mixed reaction from major European banks to appointment of Naoto Kan as new Japanese finance minister. ING is pretty scathing, saying the appointment sidesteps a process of change Japan must undertake to avoid further stagnation or a fate far worse.

“PM Hatoyama has appointed someone with no experience in economic management… Mr. Kan takes on the finance minister role without a well documented, deeply considered policy agenda. Here we rely on reports of positions he has taken in the Cabinet, and from public statements on economic management. These suggest his instincts are to pursue a stimulus strategy involving higher government spending; a weaker yen and ultra-loose monetary policy. Mr. Kan appears tone deaf to microeconomic reform or to the threats to financial stability posed by high public debt.”

The implication, ING says, confirms its worries about Japanese government bonds.

Could it be that equity and bond investors are living in the best of all worlds at the moment?

Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.

 Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return. 

Trade protectionism – or at least the threat of it — has raised it head as the global economy has declined, bringing with it all the historical fears about the Great Depression. Consider the flurry of concern about a “Buy American” clause in one of the U.S. stimulus bills.

It is traditionally assumed that widespread protectionism would most hurt the biggest economies, the United States and Japan. But Barclays Capital analyst David Woo says this is not so and that Russia, Canada, Australia and Sweden are the most vulnerable.

Woo studied various factors that would play on the effect of protectionism on a country, from openness and flexibility to its dependence on trade and it savings.