Asian Market Update: Equities Retreat from Multimonth Highs in Japan on Late Session Selloff in Asia; Australia's Job Ads Portend Improvement Ahead of May Unemployment Report; USD, JPY Gain on Return of Risk Aversion

- Equity markets in Japan and Korea are falling for the second consecutive session amid the rise in perception over the recent rebound being overdone in terms of pricing in a recovery. Nikkei225 opened down 0.4% after rallying to 8-month highs at the start of the week then rose toward unchanged levels but sold off sharply coming out of midday break, trading off by 1% at 9,767. In Sydney, S&P/ASX selling was limited to -0.4% despite the weakness in commodity space and the index being closed for the holiday in the prior session when major markets in Asia traded lower. Taiwan and Hong Kong markets retained their position at the forefront of selling from the prior session, declining 2.1% and 1.6% late in the day, tracked closely by the selloff in Korea where the Kospi was off by about 1%. Front-month S&P contracts fell 0.3% after initial 0.3% rally at the start of the Asian session after US markets staged a late-day rally to finish around unchanged levels.

- Tokyo session saw a pair of large exporters considering a debt offer as Nikkei news speculated on Toyota deciding to issue up to ¥100B this week and Sony intended to sell up to ¥220B in bonds with 3yr, 5yr, and 10yr maturities. In other Japanese press reports, JFE said it would scale back its output cuts amid returning demand from hybrid vehicle makers and manufacture of consumer electronics for Chinese markets. On the macro side, the Nikkei reported that recent data suggests the government would be unable to achieve fiscal balance by 2011/12 as planned earlier. The new target expected to be proposed by economic advisory council sees the deficit only being cut in half by 2014 and a balance in budget not seen before 2019.

- In spite of the poor performance on S&P/ASX, Australia's economic data was largely positive. May ANZ Job advertisements registered its best levels since April of 2008 at -0.2% vs -7.5% prior - figure that may portend an upside surprise ahead of the overall May jobs report for Australia coming later this week. May NAB Business Conditions figure retreated to -14 from -10, but Confidence was much higher at -2 v -14 prior - the highest level since Feb. 2008. Speaking in the wake of the better figures, Prime Minister Rudd noted that business confidence job advertisement data are indicative of progress from fiscal stimulus and stabilization in labor markets.

- Korean markets digested a mixed set of data but were dragged lower by basic materials and industrials sectors.
Regulators saw insufficient capital holding by financials, prompting rumors of BOK to inject $2B into South Korean banks.
South Korean PPI also turned negative for the first time since August of 2002, portending fleeting inflationary concerns. On the flip side, Credit Suisse had reportedly raised its target for Kospi index to 1,650 from 1,500 prior estimate relative to the current levels below 1,400. South Korean Govt spokesman also focused on the significance of Q2 GDP to be released in weeks to come being critical in terms of determining whether the local economy had bottomed out. Recall Q1 GDP came in higher than expected at +0.1%, helping the economy avert a recession.

- In currencies, return of risk aversion across equity markets recoupled with gains being seen in the US dollar and Japanese Yen against European and commodity majors. EUR/USD declined toward 1.3850s, USD/CHF advanced to 1.0950's and GBP/USD tested the downside of 1.60 handle. The rally in Sterling taking the pair from 1.58 to 1.61 in the US session was widely attributed to UK PM Gordon Brown being able to rout a coup within his own party forcing his possible resignation. However, rising Sterling demand was also evident on reports of approaching acquisition of Barclay's BGI unit by BlackRock. In other notable UK developments, May RICS house price balance came in at the highest level since November of 2007 at -44.1% v expected 52.0% and prior -58.7%. In commodity FX, AUD moved down to 0.7850s session low, while USD/CAD rally was contained by 1.12. Japanese Yen was firmer against both the greenback and in crosses, reaching 97.80's in USD/JPY, 135.70 in EUR/JPY, and 156.60 in GBP/JPY.

- Crude oil prices are higher in Asia, but trading off of their best levels. Earlier during the session, oil prices traded as high as $68.90/bbl, before pulling back as various Asian equities indices reversed into negative territory. In terms of oil demand, Japan's government projected that the country's 2009 crude oil imports would decline between 5-6% y/y in 2009, as compared to a 13% y/y decline in Q1. Overall crude prices continue to be influenced by economic data, equities and the dollar. However, bears note that demand trends need to improve in order for the rally in oil prices to be sustainable. Spot Gold is lower and has traded below the $950/oz level on the firmer dollar. In NY trading, gold neared a 2-week low below $944/oz as the EUR was sold against the dollar after S&P cut Ireland's sovereign rating to AA from AA+.