Asian Market Update: Japan Services Demand Registers Biggest Contraction in 12 Years; Moody's Cuts Queensland Rating in Australia, while Aussie Consumer Inflation Outlook Slips

- Asian equity markets are mirroring the caution seen in the US where, for the second straight day, early session rallies are extinguished in the final hour for a lower daily close. Nikkei225 extended initial slide, entering midday break down 1.2%, while Australia's S&P/ASX and Korean Kospi trailed behind entering the final hour with respective 0.5% and 1.1% losses.
US equity rally sputtered after the opening hour buying and then accelerated losses following the release of minutes from the last FOMC meeting that revealed the Fed being open to expanded quantitative easing and reminded markets about the precarious state of the economy, forecasting a deeper recession in 2009 and slower rebound in 2010. The equity weakness following dovish Fed rhetoric was also felt in US fixed income and currency markets, as benchmark yields fell below 3.20% and dollar accelerated its losses across the board. In other notable after-hours news, Financial Times speculated that Bank of America was looking to raise $7B in asset sales out of the $35B it planned to come up with before October, also remaining committed to timely repayment of TARP loans by the end of the year. In late session Asian trading, front-month S&Ps were lower by 0.5% while benchmark treasury yields oscillated just below the 3.20% levels.

- Most recent set of poor economic data from Japan justified yesterday's rejection from BOJ Chief Shirakawa of the bank upgrading its forecast for domestic economy when it meets on interest rates tomorrow. March Tertiary Industry Index registered the biggest contraction in 12 years, falling below estimated -1.5% figure at -4.0%. On the flip side, commenting on concerns over Japan's government taking on additional debt, Moody's noted that it will not undermine solvency of Japanese govt. The statements support the vote of confidence the credit rating agency extended to Japan two days ago when it unified govt credit ratings at Aa2 with a one-notch JGB upgrade from Aa3. Moody's proved to be less generous in Australia however, slashing ratings on state of Queensland by 1 notch to Aa1 from Aaa, reflecting its outlook on deteriorating debt performance and overall financial stability. In other Aussie data, consumer inflation estimates for the month of May were 2.3%, off from last month's 2.4% - in line with near-term downward trend on inflation recently forecasted by Aussie officials.

- In other regional macro developments, Singapore Q1 Final GDP improved from earlier estimates, with Q/Q figure rising to -14.6% from prior -16.4% and Y/Y seeing a smaller contraction of -10.1% v -11.5% prior. Accompanying the data, Singapore officials saw "no decisive indicators" of economic recovery, but did suggest that the need for another stimulus package is "less likely" in lieu of the recent stabilization. In Taiwan, Q1 GDP was rumored to have contracted by 10%, deeper than the projected 9.3% decline. Elsewhere, HKMA's Yam committed to additional intervention to defend the official 7.75 peg if needed.

- In Japan's corporate sector, Mitsubishi UFJ noted the company will no longer issue earnings outlook due to lack of visibility, countered by positive development from materials sector where Mitsubishi Materials forecasted return to full production by August in response to resurfacing demand for Japanese automobiles. Negotiations within the sector supply chain have been receiving substantial press in the last couple of sessions as Japanese and Korea steelmakers vie for pricing concessions from miners Vale, Rio Tinto and BHP of as much as 30-35%. Looking to secure the full-year pricing contracts, miners were reportedly not willing to accept the hard-line 40% concessions sought by Chinese steelmakers, but would consider agreeing to 30% cut for Korea. on a related bilateral sector saga unfolding in Rio Tinto - Chinalco deal, Chinese authorities were reportedly willing to be more flexible in restructuring its transaction with the company, cancelling a contractual claim to 30% of Rio Tinto's iron ore production.

- In currencies, losses incurred by USD were largely consolidated in Asian hours against the European and commodity majors. GBP and AUD were at the polar opposite spectrums, with GBP outperforming others and rising to fresh multi-month highs against the greenback above 1.58 while AUD was relatively weaker after the Queensland downgrade. EUR/USD was narrowly range-bound around 1.38, while USD/CHF traded within 1.0980-1.1020 band. Japanese Yen consolidated its gains below 95.00 vs USD and see-sawed around the 130 handle vs EUR.

- Crude oil is lower in Asia on profit-taking and the weakness being seen in most Asian equities indices. During the NY session, crude rose by more than 3% and had its highest settlement since early Nov. In NY, crude was supported by bullish US Department of Energy inventories data, which showed that inventories of oil and gasoline declined more than analysts expectations (DOE CRUDE: -2.1M V -1.2ME; GASOLINE:-4.3M V -1.2ME). In Asian oil news, South Korea's state-run oil company, KNOC, said that it planned to increase its crude stockpiling by 3.4% by 2010 from the current level of 38.7M barrels. South Korea is Asia's 3rd largest oil importer. Spot Gold is higher and trading above $940 on the weaker dollar and geopolitical concerns. In Asia, press reports disclosed that the FBI arrested 4 US citizens for plotting to bomb a New York City synagogue. The individuals were also said to be plotting to shoot down US military planes at the New York Air National Guard base. The news of the 4 homegrown terrorists followed reports during the European session that Iran launched an advanced surface-to-surface missile. During the US session, gold rose by more than 1% and had its highest settlement since March 26 as the Fed said it may expand its program to purchase assets, which could increase the supply of dollars. In terms of technicals, gold has risen above the $935/oz level, which was seen as resistance earlier during the week, and one analyst is currently noting resistance in the $950-52 area.