Asian Market Update: Rio Tinto Secures Contract with Nippon Steel, as Vale Maintains Output Target on Expectation of Recovery in China Demand; Fallout from North Korea Nuclear Test Manifested in USD Rally

- Asian equity markets appear to be increasingly more cautious in the wake of confirmed nuclear test by North Korea and firing of short-range mission over the prior session as well as the subsequent saber-rattling in defiance of the US, UN Security Council, and the aftermath of stalled six-party North Korea talks. Nikkei225 and Korea's Kospi - markets most sensitive to geopolitical uncertainty on a regional basis - led the decliners with near 1% drops early in the second half of the session. In contrast, Australia cheered signs of breakthrough in regional commodity pricing negotiations between miners and steelmakers, with basic materials and industrials sectors leading S&P/ASX up 0.5%. Front-month S&P futures looked ahead to traders returning from long weekend in time for critical week for the US housing sector - drifting around unchanged levels ahead of Tuesday's S&P/Case-Shiller figure. US fixed income recovered recent losses on safe-haven flows into treasuries on hightened geopolitical concerns.

- The case for a bottom in demand for hard commodities in the Asian region was further supported by statements from two of the mining sector's top-three names. Rio Tinto's iron ore chief Walsh suggested that a near 20% sequential bounce in iron ore exports for the month of March justifies calling a floor for spot ore prices, issuing a positive medium-term outlook for the markets. With greater focus on China region, Walsh noted that there is rising evidence for a V-shaped recovery for that economy - sentiment echoed by Vale officials planning to keep output at par due to a rebound in China demand.
Regarding the ongoing discussions with steel-makers, Walsh stated that benchmark price talks continue with companies from China, Europe, Japan, and Korea, and would conclude sooner than expected. Later in the session, the company confirmed reaching an agreement with Japan's Nippon Steel, cutting full-year contract price by 33% for Pilbara iron ore fines and 44% for iron ore lump price.

- UN Security council, holding an emergency meeting after the confirmed nuclear test on Korean peninsula, unequivocally condemned the action, calling it a clear violation of the current resolutions. The groundwork and commitment to a joint response remains murky however, as Japan is far more likely to call for the stiffest penalty on the table including a ban of all exports to North Korea. In turn, China and Russia, who enjoy more economic cooperation with the communist state, could be willing to push for greater lenience within the framework of consequences.

- Regional economic data saw generally mixed to positive figures from New Zealand, South Korea and Singapore. New Zealand Q2 inflation expectations declined slightly to 2.2% from 2.3% prior, the lowest figure since Q3 of 2003. However, Kiwi trade data topped forecast of NZ$250M at NZ$276M, a third consecutive surplus after nearly a year of deficits. South Korea May Consumer Confidence and Singapore April Industrial production were the bright spots on the calendar.
Consumer sentiment in Korea rose to a 2 year high of 105.0 vs 98.0 prior, while Singapore Industrial Production topped M/M forecast of 6.3% increase at 24.7%. In speakers, Australia's Treasurer Swan issued a similarly rosy assessment for Chinese demand as seen in the corporate sector, noting that early evidence pointed to fiscal stimulus being felt in the economy which still has a long way to run in outperforming the developed world. Despite the optimism from national Treasurer however, South Australia's state treasurer forecasted a credit rating downgrade similar to that seen from Moody's for the state of Queensland. Elsewhere, BOJ Deputy Governor Nishimura commented on the recent rise in US Treasuries, joining the fray in the region about the growing fears of fiscal health for the US economy amid prospects of expanded quantitative easing expressed in the Fed minutes last week.

- In currencies, the US dollar strengthened moderately against European and commodity majors, while Japanese Yen pared its geopolitically-driven early week decline. EUR/USD fell back below 1.40, Sterling traded down to 1.5860, and USD/CHF rallied about 50 pips to 1.0880. NZD/USD was immune in the aftermath of RBNZ inflation estimates but did retreat on broad USD strength to 0.6150's, while AUD briefly fell some 70 pips from session's best levels below 0.7750. Japanese Yen was a touch firmer, trading in narrow 94.60-95.10 against the greenback.

- Crude oil prices are lower, tracking the weakness in Japanese equities. The decline in oil prices is also coming as the USD is firmer against the commodities currencies. The key event risk this week for oil prices is the OPEC meeting. On today's session, the Saudi Arabian Oil Minister was quoted in the press as saying that OPEC is not expected to change its production level. Additionally, Nigeria's Oil Minister noted that he expected production to rise in the coming months and Algeria's Oil Minister said he expected OPEC's output to be steady. Conversely, Iran's OPEC Delegate reiterated that an output cut within OPEC is a clear solution to limit market oversupply. In other oil supplies related news, Chevron reduced its Nigerian output by 100K bpd. The output cut by Chevron is equal to about 27% of its 2008 Nigerian production and is due to damage suffered to a pipeline located in the Abiteye area of the Delta State, following an attack by militants. Spot Gold is lower on the session, tracking the firmer dollar. Gold has for the second consecutive session failed to benefit from the geopolitical concerns related to North Korea as the USD has seen safe haven flows.