Mission far from accomplished

An investor uses a pair of binoculars as he looks at an electronic board with stock information at the Iraq Stock Exchange in Baghdad March 10, 2010.

LONDON (Reuters) - Another week, another set of central bank meetings and more to digest for investors on monetary policy and the withdrawal of crisis liquidity.

The U.S. Federal Reserve and Bank of Japan both meet in the coming week, but far from unwinding the easy money policies embedded over the past few years to ignite economic growth both are likely to admit implicitly that the job is far from done.

That in itself should give investors pause for thought.

Does the extension of loose money allow for current investment patterns to continue, with money pouring out of cash into higher-yielding assets?

Or does it mean, as some are beginning to believe, that markets have been floating on artificial liquidity and that the underlying global economy is not in true recovery mode after all?

Wednesday's Fed meeting, for example, is not only seen as holding interest rates near zero, it is also seen repeating a vow to have an "extended period" of "exceptionally low" rates.

It is likely to stick to its plan to end purchases of around $1.7 trillion in assets. But it could well leave the door open for a renewal of purchases at a later date should economic expansion fall back.

The Bank of Japan, meanwhile, is under pressure to loosen policy at its meeting on Tuesday and Wednesday, most likely in the form of increasing funds offered under its lending operation.

Japan's economy grew less than initially estimated in the fourth quarter and a broad gauge of price trends posted the biggest negative reading on record.

So while there may be expressions of optimism from policymakers that the global economic recovery is taking shape, there is little sign that they reckon it is anything like fully formed.

BEARS COME OUT TO PLAY

The fragility of the economic recovery has divided investors, with many mainstream firms persuaded that factors are in place to allow for gains from riskier assets such as equities to continue, albeit modestly.

Eric Siegloff, head of ING Investment Management's strategy and tactical asset allocation group, said in a note, for example, that his portfolios were overweight equities and underweight fixed income.

"Macro supports are clear from still accommodative policy settings, improved financial conditions and the inventory cycle," he said.

But more bearish noises have been heard, some even suggesting that there could be a reversal to lows experienced a year ago in March 2009.

Once such is Colin McLean, managing director of alternative investment house SVM Management.

"Rallies within bear markets can be quite large and quite sharp. The best indicator is from financials.... They're still a concern," he told a group of Reuters journalists recently

A similar picture can also be drawn from some technicals. Peter Beuttell, director of advisers MTS Research, follows Elliott Wave theory, which tracks patterns on markets to glean their next direction.

"We could be approaching a junction," he said. "Markets are about to roll over in the next few months."

ABC - ANYTHING BUT CASH

Whether this gloomy scenario comes to pass remains to be seen, presumably depending on economic data showing that the recovery has not, in fact, taken hold.

But for the moment, at least, investment patterns are reflecting a general environment of restrained growth.

MSCI's all-country world stock index -- up nearly 78 percent from its year-ago low -- was heading toward its fourth week of gains out of the past five and is now in positive territory for 2010.

Fund flows, meanwhile, show ultra-low interest rates are continuing to drive money out of cash and into other assets. EPFR Global says a net $194.8 billion has come out of money market funds so far this year.

Bond of various risk levels have been among the beneficiaries.

During the week ending March 10, U.S. and global bond funds extended inflow streaks to 62 and 47 straight weeks, respectively. High yield bond funds took in more than $1 billion and emerging market bond funds moved beyond $5 billion for the year to date with their biggest weekly inflow in over a decade.

Flows into emerging market equities hit an eight-week high.

European stocks, still wobbling over the sovereign debt crisis in Greece and potentially other countries, were the only major developed market category to see net outflows.

(Editing by John Stonestreet)