Asian Market Update: US Equity Selloff on Retail Sector Worries Spills Over to Asia; Rio Tinto Declines over 10% as Chinalco Deal Appears Increasingly Less Likely; USD Consolidates Gains vs Majors as Risk Aversion Returns

- Concerns over slow recovery in the consumer sector following worse than expected April US retail sales sunk equities on Wall Street and continued to do damage in Asia. Just ahead of the final hour of trading in Tokyo, Nikkei225 was off by 2.5%, S&P/ASX declined 2.8%, Korea's Kospi shed 2.1%, while Hong Kong index led the unanimous regional decline with a 3.2% drop. Given the rising US unemployment and sharply increasing domestic savings rate, there is little reason for the markets rising based on the perceived recovery in financials to be surprised by these findings in the retail sector. Indeed, a bigger miss seen in March retail sales sparked a 1.7% session selloff in the S&P on April 11th - a loss that was mostly recovered over the course of the next session. Follow-through in selling could suggest more protracted caution in equity markets however, particularly as traders react to potentially dilutive deluge of share offerings seen in recent sessions, and take profits from the overextended 30% rally off the Mar 9th lows seen in the S&P. Front-month S&P futures were slightly lower in late Asian hours, trading down 0.3% at 883.

- The decline in the Nikkei was largely led by weakness in tech and financials names, with some of the retail-sensitive companies curtailing production and others reporting fiscal year results well below estimates. Hitachi and Toshiba were rumored to plan closing their flat-TV LCD manufacturing facilities in Europe, while NEC dropped out of government-sponsored supercomputer manufacturing initiative that sent its shares down 7%. Camera-maker Nikon was down 7% on FY08/09 net ¥28.1B falling well short of ¥75.5B expected, and Pioneer dropped 13% after posting net loss of ¥130.5B v loss ¥19.0B in the prior year on revenues of ¥558.8B v ¥774.5B last. Forecasts for Pioneer's current year is not expected to improve much, with estimated net loss of ¥83.0B expected in FY09/10. Tokyo financial sector weakness was led by Mitsubishi UFJ, where shares fell over 5.5% in the aftermath of cancelled plans for Nikko Citi purchase. Sumitomo and Mizuho were not far behind, falling about 4.5% and 5% by midday break respectively. In materials sector, OJI Paper traded down to unchanged after earlier 2% session strength after the company posted a FY08/09 Net Loss ¥6.3B v Loss ¥7.0Be, but forecasted Net profit in this fiscal year slightly below estimates.

- Elsewhere in Asia, Rio Tinto shares continued their steep decline with a 12% after key shareholders were rumored to forecast substantial opposition to the Chinalco deal, giving preference to a rights issue. Recall over the prior session, Rio prices fell amid UK Telegraph citing chatter of the company considering a £5B rights issue. In other material sector names, Aussie miner BHP was also lower by 6%, while Korea's steelmaker Posco was down 4% on speculation the company would lower prices for steel this month by as much as 20% - the first price cut for the company in 3 years.

- Asian economic calendar was limited to New Zealand April Business PMI rising to 43.7, the best reading on the index since September 2008. In South Korea, government's KDI agency cut 2009 GDP forecast to -2.3% from prior +0.7%, but also anticipated 2010 GDP recovery to 3.7% and urged the BOK to scale back its easing measures once inflation potential resurfaces along with economic recovery. In Japan, traders were taken by surprise on media speculation of the government potentially raising its economic assessment later this month for the first time in over three years on early evidence of exports and production exhibiting signs of bottom. Regional speakers were predominantly cautious: Korea's Finance Minister saw few signs of recovery in the labor markets with sub-3% May consumer inflation, Aussie PM Rudd reiterated Treasury view of the budget forecasts being on the "conservative side", and Taiwan Premier Liu acknowledged that the recent rally in domestic equities may be outpacing the actual pace of recovery in the economy.

- In currencies, USD consolidated its broadbased gains vs European and commodity majors after rising sharply in US hours. EUR/USD traded down to 1.3520's, GBP/USD briefly retested the downside of 1.51, and USD/CHF rose above 1.11. AUD/USD retreated from US session support just above 0.75, while USD/CAD was rangebound between 1.1720-60.
Japanese Yen trading was notably more volatile, as JPY actually fell against USD to 95.70 and failed to gain much bullish traction against EUR and GBP, as pairs backtracked higher after briefly falling below 129 and 144 respectively.

- Crude oil prices are lower in Asia and declining for the second consecutive session. During the US session, oil prices dropped by more than 1%, which was the biggest one day declined since late April. In OPEC news, the cartel released its May report, in which it cut its global demand forecast for the 9th consecutive month. OPEC now sees 2009 global oil demand declining by 1.57M bpd versus the prior expectation for a drop of 1.37M bpd. Additionally, OPEC noted that its compliance rate with its already announced supply cuts declined to 77% from 82%. In terms of supplies, OPEC's April production rose on a m/m basis for the first time since July 2008. Furthermore, OPEC's monthly report predicted that Saudi, Angola, Iran and Venezuela would increase output. During the US session, the Department of Energy disclosed that crude and gasoline inventories unexpectedly declined during the prior week (DOE CRUDE: -4.7M V +1.1ME; GASOLINE: -4.1M V +500K), which confirmed the earlier API figures. Spot gold is lower in Asia, after gaining $2 during NY trading. Gold continues to be driven by the direction of the dollar, equities, volatility in markets and risk aversion. In terms of investor demand for gold, the SPDR Gold Trust ETF increased its holdings by 1.5 tons to 1,106 tons, which was the first increase since April 9.