Asian Market Update: Rumors of Federal Partnership with Private Sector in Toxic Asset Management Spark Short Squeeze; RBA Shocks AUD Higher, Leaving Rates Unchanged; Korea Talks Tough on Intervention After Disclosing Reserve War chest; USD, JPY Decline as Risk Appetite Replaces Panic

- A colossal 4% selloff across US indices that saw the Dow fall to 1997 lows below 7,000 has been replaced with moderate optimism, as investment community cheered rumors of a new proposal from the Obama administration. According to a WSJ report, Washington is considering creation of multiple investment funds to be run by private managers that would take a stake in as much as $500M-1B of bad loans with federal backing, potentially thawing the credit freeze fed by the toxic assets in the banking sector. While details on the structure of the private-public partnership in management of this new "toxic asset market" and the nature of its oversight remained unclear, the idea of shared responsibility was lauded with buying, as equity markets in Asia reversed early session losses and S&P futures rallied over 1%. Adding to positive sentiment in the US was a report concerning Citigroup, as it was rumored to lower mortgage payments for unemployed homeowners and waive interest and penalties so as to forestall foreclosures among troubled borrowers. Citi estimated that thousands of its distressed mortgages would be helped by theses planned measures.

- In Tokyo, the Nikkei pared much of its early session weakness, rallying to finish the day down just 0.7% after trading as low as -2.7%. In addition to reversal in US equities, Japan's markets were boosted by more activist rhetoric from the new finance minister Yosano, who said that excessive equity declines cannot be ignored. Meanwhile, Nikkei shrugged some of the more troublesome news from Toyota and Sony, with the former's Financial Services unit reportedly applying for a $2B loan backed by the government, and the latter said to be reexamining its dividend policy amid rising speculation of securing additional funds beyond the end of the fiscal year.

- Sydney's S&P/ASX was also well off early session lows of nearly -3%, gaining sharply to finish down by just 1% after more strong economic data and a surprising hold to interest rate cutting cycle at the RBA. Earlier in the day, January retail sales came in above estimates of a 0.5% decline at +0.2%, prompting Treasurer Swan to note that retail sector bounce is indicative of impact of the fiscal stimulus. In turn, RBA cited relatively strong financial system, lower mortgage rates, and substantial monetary easing yet to work its way into the markets in justifying its pause in the face of deteriorating global slowdown. Most recent strength in other economic data from Australia - such as better than expected private sector credit and wage inflation seen last week - is also attributable to a more hawkish RBA, as estimates recently saw a revision in consensus for this meeting to a 25bp easing from 50bp easing. Separately, Aussie PM Rudd targeted return to a budget surplus when the economy returns to above trend conditions after Q4 current account came in at -A$6.5B deficit.

- In a welcome recovery from the recent meltdown, Korea's Kospi traded up 0.4% late in the day after initially falling by as much as 2.5% in early session. Talks of "March crisis" driven by fear of loan repatriation from the troubled financial sector took a backseat after South Korea revealed a relatively undamaged war chest of $201.5B in FX reserves - nearly on par with y/y level - and signaled close monitoring of its equity and currency levels. Finance Minister Yoon said that KRW could change course at any time while also confirming intervention this week, prompting some KRW buying from near multi-year record low levels. Additionally, Yoon announced plans to give bigger tax breaks on corporate CAPEX, while also focusing on domestic job creation and restructuring of property taxation rules to boost regional markets. Separately, South Korea's February CPI relieved downward pricing pressure fears, coming in well above expectations of 0.1% and 3.5% on m/m and y/y basis at 0.7% and 4.1% respectively.

- In currencies, return of risk appetite boosted European and commodity majors at the expense of the greenback and Japanese Yen. EUR/USD bounced from session low 1.2540 to nearly 1.2680, while USD/CHF fell nearly one big figure below 1.17. After initial weakness on rumors of quantitative easing measures from Chancellor Darling, GBP/USD rallied above 1.41 from sub-1.40 territory. Commodity FX was particularly strong on added RBA booster, with AUD/USD rising from 0.6290 to 0.6430, NZD/USD coming within pips of 0.50, and USD/CAD falling from 1.2930's to intra-session floor in 1.2840's. Japanese Yen was slightly lower against USD above 97.50, but fell sharply in cross-pairs on broad EUR, GBP, and AUD gains.

- Spot Gold is lower, after dropping by more than $2 during the NY session. Currently gold is trading below the $930 level which had been seen as a pivot and according to some the next support level for gold prices is $882. Today's Asian session drop in gold comes as the S&P 500 futures have moved higher by more than 0.75% and as the SPDR Gold Trust ETF has so far this week failed to increase its holdings of bullion. At the time of writing crude oil is higher by more than 0.40% and trading above $40/bbl, after falling by more than 5% during the NY session. Oil prices continue to track the equities markets and the outlook for the global economy. In terms of OPEC commentary, Iran's oil minister noted that he sees additional room for supply cuts, after noting during the prior session that he did not believe that OPEC will cut production further. Additionally, Algeria's oil minister said that a production cut was “likely” at the OPEC meeting in March, after saying just 1 day earlier that additional cuts were ” possible” at the meeting. In terms of oil demand, China's largest refiner, Sinopec said that in Jan, China's fuel consumption declined by 16.6% y/y, diesel demand dropped by 30.2% and gasoline demand increased by 8.4%.