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Asia Market Update

Financials Lead Global Selloff after BAC

Tue, Apr 21 2009, 11:46 GMT
by Trade The News Staff

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Asian Market Update: Financials Lead Global Selloff after BAC; Australian Officials Concede Recession, Igniting AUD Selloff Across the Board, while RBA Downgrades Outlook for Demand; GBP/USD Reaches 3-week Lows Below 1.45; Gold Consolidates Gains Following $24 Pop

- The 24% drop in Bank of America shares that helped spark financials-driven 4.3% selloff in S&P and 3.6% decline in the Dow translated into broad-based losses across the Asian bourses. The Nikkei declined as much as 3% and traded down 2.8% going into midday break before recovering slightly in latter hours. Korea's Kospi was also weaker by over 2.5% prior to a rebound to -0.5%, while S&P/ASX traded around its worst levels, down by over 2.2%. A WSJ edition of "Heard on the Street" suggests that the 46% increase in BAC's nonperforming losses proved to be far more salient, implying a greater likelihood of the Treasury growing less comfortable with the Bank's falling capital ratio and converting its preferred holdings into common shares. Aside from fears of dilution at BAC, an aura of distrust over banks' results, further evidenced by Barron's weekend review of Goldman omitting its December losses by virtue of altered reporting period, and vague rumors of stress test results providing a far more gloomy sector outlook than previously rumored added to the damage in financials. US earnings season attention now turns to Industrials and Consumer names, with Caterpillar, Lockheed Martin, Delta Air, and Coca Cola on tap to report in early US session.

- Australia's notable underperformance, both in terms of equities and currency, is attributed to several key factors. Risk aversion in equities translated into severe price declines in metals as 4%-6% drop in copper, zinc, and nickel contracts punished mining names, with shares of BHP and Rio Tinto falling by about 4%. Aussie financials were also lower, tracking declines from the US, while in energy, the sharp decline in crude weighed down Woodside Petroleum by as much as 3%. On the upside, gold producers Newcrest and Lihir gained over 3% as precious metal rallied over $20 in US session, and WesFarmers rallied after recording an increase in food/liquor sales. More notable for Australia however, is this session's unanimous admission by Aussie government and monetary officials of the economy officially entering recession. Having teetered on the brink of that concession for months, the most recent round of economic data has forced officials to admit the economy succumbing to more protracted weakness. In response, Australia's PM Rudd signalled the likelihood of more economic stimulus with the upcoming budget, and RBA Governor Stevens forecasted continued decline in inflation being likely over the next couple of years and a lower global growth relative to the prior decade to persist for some time.

- On the Nikkei, financials led decliners going into midday break with a 4% drop, while materials, energy, and industrials sectors followed with a loss of over 3.5%. In notable Japanese shares, Mitsubishi fell over 6% after Nikkei report of declining coking coal prices hurting trading companies.
Sony led electronics lower with a 5% drop, with sector losses magnified by currency strength. Toyota fell about 4% on press speculation of domestic production declining to 2.8M units - a downgrade from prior figures. Meanwhile, KDDI was among the few notable gainers, rallying 2.5% on Nikkei speculation the company would post a FY operating profit roughly in line with prior estimates. In Japan's macro developments, govt sources rumored the expected GDP downgrade would be around -3% v most recent official forecast of unchanged growth, and Fin Min Yosano announced an issue of over ¥10.5T in new bonds for the upcoming extra budget.

- In currencies, the broad-based rally in the dollar and JPY against European/commodity FX was consolidated over the Asian hours. EUR/USD and GBP/USD rose to 1.2950's and 1.4550's respectively. AUD/USD regained the upside of 0.70 handle, USD/CAD encountered resistance above 1.24, and NZD/USD rose some 50 pips to 0.5560's. JPY, failing to taking out session lows in 97.60's retreated above 98.40's against USD and bounced off multi-month uptrend above 143 vs GBP.

- At the time of writing, crude oil prices are higher by more than 0.05% and trading above $45/bbl.
During the US session, crude oil prices declined by more than 8%, tracking the weakness in US equities. In terms of oil related commentary, during yesterday's US session Goldman Sachs noted that it saw oil prices declining to $45/bbl before rallying to $65/bbl by the end of 2009. Back in early Jan, Goldman also noted that it expected oil prices to reach $65/bbl by the end of the year. In other oil market commentary, BP's Chief Economist said that he expected oil demand to stabilize in the second half of 2009 as economic conditions improve. Spot Gold is higher, after gaining more than $19 during the NY session. Gold is benefiting from the declines in equities prices and the renewed concerns about financial companies.

Published on  Tue, Apr 21 2009, 13:05 GMT

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