Asian Market Update: Tokyo Equities Shrug US Weakness as Monthly Retail Sales Rise to Multi-month Highs; S&P Raises New Zealand Currency Rating Outlook to Stable on Policy Flexibility After Budget Report Forecasted 10 Years of Deficits

- Asian equity markets traded mixed despite the bearish sentiment on Wall St. that was widely attributed to more extreme selling in US Treasuries, with rising yields also helping the greenback. Nikkei225 led the gainers on better than expected retail sales report for April as well as JPY decline to 1-week lows boosting exporters. Korea's Kospi shrugged some of the recent geopolitically driven malaise in the region, gaining 0.5%. S&P/ASX was down by over 1% however, as the USD strength impacted commodity prices to the downside feeding into the selloff led by materials and industrials sectors. In US equity index futures, front-month S&Ps were slightly lower early but entered the final hour of trading in Asia closer to unchanged levels.

- In Tokyo, April retail trade figures surprised the markets with the slowest pace of Y/Y contraction in 3 months at -2.9% v -3.3%E, while M/M figure saw the first expansion in 7 months and the highest level of growth since 2007 at +0.6%. Consensus estimates called for 0.5% increase. An update from Japan's auto sector was somewhat less upbeat albeit also lagging. Japan's own "Big Three" auto names - Toyota, Honda, and Nissan - reported global output drops for April at -50%, -30%, and -38% on a y/y basis. In other corporate news, pharma name Daiichi Sankyo reported FY08/09 net loss narrower than the expected ¥320.5B at ¥215.5B, sending its shares toward unchanged levels following the release. Nippon Steel, building on the positive momentum from securing full-year iron ore contract and a price cut from Rio Tinto, traded higher by over 2% after Japanese press reported the company's utilization rate may be raised to 60-70% from 50% by as early as July on expected retraction of automaker output cuts. NEC Electronics was up 4% after Nikkei press reported the company's proposed merger with Renesas would be done at 1-1 ratio.

- New Zealand markets saw a great deal of volatility in the session leading up to as well as in the aftermath of the annual release of NZ Budget. The finance ministry saw 08/09 deficit of NZ$8.46B - above the speculated NZ$8B level - followed by expectations of 10 years of finance deficit. Implications of a credit agency downgrade played into the disappointment seen across the Kiwi equity and currency markets, with NZX falling 1.7% and NZD declining in the wake of budget release.
However, Moody's affirmed New Zealand's outlook as Stable despite the caution on prospects of declining tax revenues, and S&P surprisingly raised its outlook for Foreign Currency Rating to Stable from Negative citing flexibility of New Zealand's fiscal position. The actions helped spark a Kiwi dollar rally, sending NZD/USD above session-opening levels and AUD/NZD to late-April lows. In Australia, Q1 Private Capital Expenditure came in at multi-year record low of -8.9% v -6.0%e, contributing to the local equity market's underperformance. RBA Dep Governor Battellino also spoke in Sydney, reassuring investors that central bankers were monitoring inflationary trends and could reverse easing quickly if conditions improved more markedly.

- Korea's Kospi shrugged weakness on healthy dose of economic data and positive news from corporate sector. Latest update on the manufacturers sentiment index revealed the first reading above 100 since Q4 of 2007 at 110 v 66 in the prior quarter. Posco rallied firmly, following suit of Japanese steelmakers in securing the 33% price cut from Rio Tinto, while Samsung gained over 1% after the company renewed its patent cross license and flash supply agreements with Samsung.
An update by BOK Governor Lee also suggested a more benign outlook, with future policy said to be geared to focus on economic recovery.

- In currencies, dollar had recovered sharply from recent selling as rising treasury yields sparked some greenback appetite. EUR/USD briefly fell below 1.38, USD/CHF rose to 1.0950, and GBP/USD tested the downside of 1.59 - all near 1-week highs for the US currency. Commodity FX held up slightly better despite the weakness in metals after US session selling, as AUD/USD traded in range between 0.7750-7810 while NZD/USD rallied sharply toward 0.62 from 0.6120 session low following the S&P Foreign Currency rating outlook upgrade. Japanese Yen was also weaker across the board, as USD/JPY rose above 96.50 for the first time since May 19th.

- Crude oil prices are lower in Asia after rising by more than 1% in NY trading. Following today's US close, API disclosed that during the prior week crude inventories declined more than expected, while gasoline inventories declined less than expected (API PETROLEUM INVENTORIES: CRUDE: -2.8M V -700KE; GASOLINE: -750K V -1.5ME). Later on today, the US Dept of Energy will release its inventories data for the prior week. The key event risk for this week is today's OPEC's meeting. An unconfirmed report released ruing the US session, noted that OPEC is expected to leave its quotas steady. In terms of OPEC commentary, Qatar's Oil Min said that the cartel will not cut production at today's meeting, while the Algerian Oil Min said that he believes compliance will push prices above $60/bbl. Conversely, Venezuela's Oil Min said that he remains concerned about the level of inventories, while OPEC's Secretary General said that crude stocks were declining. Back on 5/25, the Saudi Oil Min was quoted as saying that OPEC was not expected to change its level of production. In other oil market news, the CEO of Exxon Mobil was quoted as saying during the NY session that the recent gains in oil prices are mostly being driven by currencies and market momentum. Exxon's chief added that there has been little change in crude demand. Spot Gold is lower and trading below $950/oz ahead of upcoming US durable goods figures. One analyst is noting support for gold around $940/oz and resistance at $960.