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Asia Market Update

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Japan's Fin Min, G7 express deeper concern over Yen rally; BOK cuts by record 75bp

Mon, Oct 27 2008, 08:14 GMT
by Eben Esterhuizen

TradeTheNews.com

Equity indices see mixed trading midway through the Asian session of another dreaded by market historians October Monday. Nikkei 225 has oscillated within 2% range of last week's close in early session activity - falling initially at the open, rallying by 300 points, and finally paring back most of those gains toward the unchanged levels. Initial pressure on Japan's index that pushed it to an intraday 26-year low was in part triggered by media reports concerning Mitsubishi UFJ that revealed a pressing need to bolster its capital base. However, an increasingly more activist response by Japan's policymakers was subsequently seen as helpful in forestalling yet another Tokyo rout. Comments from Japan's Finance Minister Nakagawa intentionally hitting the wire prior to market open announced new measures designed to stabilise local financial markets with a capital injection. Nakagawa reflected on weekend meeting with Japan's Prime Minister Aso, who expressed his strong commitment to working to implement market stabilization measures ''as soon as possible.''

BOK CUTS by 75bps: South Korea's monetary authorities surprised the market by calling an emergency policy meeting that yielded the largest interest rate cut in BOK's monetary policy setting history - a 75bp slashing to 4.25% in overnight lending rates coupled with a 75bp cut in special lending rate to small/medium-sized companies by 75bps to 2.50%. Additionally, the central bank eased its rules on foreign currency lending to provide relief for exporters looking to borrow appreciating dollars in order to pay for their negative FX exposure. S Korea's financial markets have been hit particularly hard on downgrade of the country's credit rating by Moody's and its projections of a 2.2% 2009 GDP in spite of Korea's 4.8-5.0% estimates. In an accompanying statement, Bank of Korea said that the rate cut was implemented in order to protect the economy and shield equity markets from a sharp slowdown in domestic demand. Furthermore, BOK noted its increased vigilance on monitoring downward pressure on the economy to determine the need and timeliness of any additional rate cuts. South Korea's Kospi traded in negative territory giving up 2.66% but well off the session lows just under the 900 level.

Elsewhere, Hong Kong's Hang Seng led the regional equity indices with an over 5% decline, pressured by reports of a much slower pace of growth and a larger than expected impairment charge seen out of Hong Kong's ICBC bank. Meanwhile, commodity producer-heavy Australia's S&P/ASX was on the losing side by over 2% following continued sell-off in crude markets in spite of a 1.5M BPD cut put into place by the OPEC on Friday. US equity markets appear to be poised for an upward bounce

with S&P futures gaining as much as 2% in Asian trading hours. Verizon (VZ) is the only heavyweight on the earnings docket reporting pre-market open with consensus estimates calling for an EPS of $0.66 Q3 on $24.5B revenue.

In currencies, the focus of the session remains with the Japanese Yen where the absence of a historically pivotal 95.00 level against the dollar prompted mass buying in Friday's Asian trading hours that pushed USD/JPY as low as 91.00. Particularly notable was the commentary coming from Japan's Finance Minister Nakagawa, who until this point seemed to be a dispassionate observer of extreme volatility in the yen, stating as recently as two weeks ago that "USD/JPY moves are not so volatile." Having met with politically- pressured PM Aso over the weekend, Nakagawas was seen as increasingly more involved in JPY trading levels, stating that excessive volatility in FX and disorderly moves do have a negative impact on the overall financial system. Additionally, he called on G7 to issue a joing stament, which had in turn expressed deeper interest and concern over excessive JPY volatility. USD/JPY recovered from its session lows of just over 92.00 to levels above 94.00. EUR/JPY bounced over two big figures to 118.50 while GBP/JPY bounced over 300 pips above 148.00. European based majors were mainly range-bound, with EUR/USD downside contained by 1.2550, GBP/USD downside reversed at 1.5650, and USD/CHF retreating below 1.16 level. AUD/USD was also contained by a relatively moderate trading range of 0.6120-0.6240. Trending conditions in the Euro-based pairs may resurface in the early hours of the European session following the release of a closely watched IFO survey which tracks direct business sentiment among a wide range of Eurozone industries, with consensus estimates calling for yet another decline in the month of October to 91.2.

Going into the weekend there was speculation that the US Treasury could disclose some of the firms that would receive capital from the US government. On today's session, it was announced that regional bank Washington Federal would receive $200M in funds from the Treasury. Additionally, Fifth Third Bancorp is seeking an injection equal to about $3.4B from the Treasury. Today's developments follow Friday's disclosures that the Treasury would provide capital to Valley National Bank ($330M received), First Horizon National ($866M) and Regions Financial ($3.5B). Outside of the US banking sector, a source reported that GM has asked the US Treasury for assistance in its merger talks with Chrysler. This development follows a WSJ report conveying that if GM did not merge with Chrysler or receive government funds, the two companies could run out of cash within 1 year. In other bail out news on Friday's session it was reported by the WSJ that the Treasury might take stakes in various insurance companies and following this report the WSJ noted that Prudential and MetLife were mulling the sale of equity to the US government.

In terms of the Japanese banking system, according to some analysts Japanese banks have avoided the worst of the credit crisis. However, it was reported in the press that Japan's three mega-banks (Mitsubishi UFJ, Sumitomo Mitsui Financial, and Mizuho Financial) were all seeking to raise capital in order to shore up their balance sheets. The press reports noted that Sumitomo Mitsui and Mitsubishi UFJ were each seeking to raise as much as ¥1T. The capital raising reports follow speculation from last week that Mizuho Financial might have to delay its ¥250B share buyback plan and that Mitsubishi UFJ might have to sharply cut its net profit estimate. Additionally, Japan's government is expected to increase its bank capital injection fund to around ¥10T ($100B) from ¥2T.

Crude oil is trading lower by more than 0.70% in a volatile session in which the commodity has swung between gains and losses. The stronger USD and weaker equities continue to weight on oil prices. According to a prominent financial newspaper, OPEC's recent output cut will not be seen in prices for weeks because oil prices have been tracking equities markets. Spot Gold is higher by more than 0.80% and gaining despite the rise in the USD and drop in oil prices. In other metals trading, Shanghai copper and zinc futures are limit down, tracking the declines in Chinese equities.

Published on  Mon, Oct 27 2008, 08:16 GMT