Asian Market Update: Rising Risk Appetite Reverses Early Equities Decline as US Govt is Rumored to Take a 40% Stake in Citigroup; Dollar, Gold Fall Across the Board

- Financial markets have served up a powerful reminder of just how much investors dislike uncertainty as Asian equities reversed the hopeless malaise of the first hour transferred from the US trading on Friday into a powerful rally on news of a broader Treasury involvement in Citigroup.
According to a WSJ report, the US Govt and Citi held talks stipulating a 40% US stake - while Citi favored a more limited US involvement at 25% - converting the preferred $45B equity held by the US into common stock. While it was unclear how far the talks have progressed, how the Obama administration would reconcile its commitment to private capital-supported US banking system, or to what extent the banking stress tests set to begin this week would impact the Citi outcome, equity bourses were clearly in favor of the expanded Treasury role. Nikkei225 bottomed at -2.8% in early trading before the Citi inspired rally brought it back to unchanged levels going into midday break. Sydney's S&P/ASX traded as low as -2.6% but finished off by 1.5% on mid-session bounce. Korea's Kospi traded particularly strongly, maintaining most of the Citi-related gains to enter the final hour up 2.5%.

- In other notable developments impacting trading sentiment for select Nikkei names, Toshiba and Mizuho Financial were weighed down by rumors that they may be looking to raise respective 300B in equity and 100B yen in preferred securities. The former traded down by 8%, while the latter lost 5% before recovering to unchanged levels with broader index rally. Toyota was also slightly weaker after Nikkei press pointed to company production estimates at 6.5M vehicles for 2009, down from 8.21M in 2008. Among the gainers, Nomura picked up 4% after an upgrade to Neutral at Goldman Sachs, while Nippon Mining Holdings rallied 1.2% on media speculation that hints of returning demand from Asian economies have resurfaced.

- Despite the bounce on Sydney, Rio Tinto remained under water by 7% after the company was reported to be moving toward appeasing its discontented over the Chinalco deal institutional shareholders, looking to offer the same terms in a bond issue as it did to China. BlueScope Steel, the top Aussie steelmaker, was also down 9% after forecasting a challenging FY09, a weaker 2H, and cutting dividend, despite posting a relatively robust 1H result. John Fairfax Holdings also reported, posting a wide loss of A$365.3M v Profit A$150Me and suspending dividend reinvestment plan, sending its shares down by 4%. Meanwhile, Newcrest Mining was up 3.6% early but sold off toward unchanged levels after Citi news sent gold prices below $990. Elsewhere, Fitch sounded off positively about Aussie banks, confirming official stance that the financial system is relatively immune to Eastern Europe exposure and well placed to deal with defaults.

- In other Asian markets, Korea's Kospi was further supported by similar activist rhetoric from a government regulator, who said that officials were mulling changing guidelines to allow public funds to be injected into more banks. Additionally, the official looked to assuage investor concerns about its debt levels to Japan, stating that it was far too small to trigger a rumored "March crisis". Thailand reported a Q4 GDP well below estimates and the levels seen during the 1990's Asian crisis at -4.3% y/y and -6.1% q/q. Thailand Planning agency also curtailed their estimates on employment, CPI, and imports/exports sharply, but also noted that the economy is not expected to perform in Q1 worse than it did in Q4.

- In currencies, the dollar was significantly weaker across the board following the Citi report, as risk appetite boosted European and Commodity majors against the recent de facto safehaven greenback. EUR/USD rose from 1.28 to reported option protected 1.2950, USD/CHF fell by about 100 pips below 1.15, and GBP/USD rose to 1.4550. AUD/USD rallied just over one big figure to 0.6520, NZD/USD met selling interest at Friday high of 0.5150 after an 80 pip gain, and USD/CAD fell to 1-week low under 1.2450. Japanese Yen was slightly stronger against the heavily sold USD, but weaker relative to other majors' gains on the dollar. Emerging FX of S Korea and Singapore were also sharply higher, with USD/KRW falling below 1,500, and USD/SGD testing below 1.52 after trading above 1.5330.

- Spot Gold opened the Asian session higher, but has since moved off of the session's best levels as safe haven assets (such as the yen and US Treasuries) moved lower following a WSJ report noting that the US government might seek to increase its stake in Citigroup. So far on today's session, spot gold has yet to trade above $1,000, after moving to a multi-month high of $1,006.29 on Feb 20.
Crude oil opened the Asian session lower, but has since moved into positive territory. The rebound in oil prices came as S&P 500 Futures reversed their opening losses. In terms of oil supplies related news, the Algerian oil minister Khelil said that he now sees production cuts as “very likely” at the March 15th OPEC meeting after noting on 2/17 that he saw an output cut as “more likely.”