Asian Market Update: China Industrial Production and Retail Sales Top Estimates, Bank Regulator Promises 7-8% 2009 GDP; BlackRock & Barclays Tie the Knot

- Asian equity markets look to put a week-ending stamp of recovery on a session that saw Tokyo and Sydney indices hit fresh multi-month highs along with more good news from China. Nikkei225 tested 10,100 level for the first time since October 7th, while S&P/ASX hit the highest level since early November above 4,050. Korea's Kospi was weighed down by geopolitical rumors of more nuclear defiance from the North, picking up just 0.4%, and Taiwan remained in the cellar with a 1.2% loss as investor capital continued to flee the island in profit-taking from the recent runup.

- As rumored in Chinese press earlier this week, China May industrial production came in well above the expected 7.7% y/y increase at 8.9%, but still sparked moderate risk appetite evident in kneejerk JPY selloff. Hard commodity driven output in copper and coal increased, while power remained a conspicuous decliner at -2.7% y/y. Retail sales were also above the expected 15.0%, up 15.2% in May. Subsequently, China's banking regulator Liu offered a mixed assessment despite the strong data, "promising" a GDP growth of 7-8% in 2009 but warning about remaining toxic assets on the books of global banks while noting that the equity market advance is not in line with the current fundamentals.

- In other notable economic data New Zealand retail sales registered its highest growth rate since June of 2008 at 0.5% v 0.2% expected, but ex-auto figures fell -0.1% v 0.4% expected. In 2nd tier reports from Japan, Final April industrial production topped Preliminary figure at 5.9% v 5.2% prior. May consumer confidence also continued to suggest some sustainability in demand, rising to 36.3% from 34.0% prior. Japan's Finance Minister also spoke in favor of USD status as a reserve currency, noting his trust in US debt was "unshakable". On geopolitical front, North Korea was rumored to be preparing its 3rd nuclear test in defiance of the sanctions expected out of UN Security Council on Friday. Additionally, national elections in Iran have commenced and are said to present considerable risk to energy markets, despite the high likelihood of the contest going into a runoff contest on June 19th.

- The banking sector received several shocks on a global scale, with notable developments out of UK, US, and Australia. BlackRock has confirmed its highly anticipated acquisition of Barclays Global Investors unit that includes the coveted iShares business for an aggregate of $13.5B made up of near-20% equity stake and $6.6B in cash. Additionally, in the US, WSJ speculated the banks approved for TARP loan repayment would begin to do so as soon as next Wednesday. In Sydney, Commonwealth Bank of Australia raised its standard variable rate loans by 0.11% to 5.74%, drawing the ire of Treasurer Swan who saw the move hampering the monetary and fiscal stimulus response. The actions saw some pronounced impact in the currency space, with GBP selling off in the wake of the BlackRock announcement and AUD also weakening following the CBA move.

- In other currency market action, volatility was relatively muted in European and Yen pairs. EUR/USD bounced around 1.41 handle and GBP/USD sold off slightly after Barclays news for a 1.6520 low. Japanese Yen fell about 40 pips against USD and EUR, with the pairs trading up to 97.90 and 138.00 respectively. In commodity FX, AUD saw the biggest selloff among the majors, declining to 0.8120 from 0.8210 intraday high. NZD/USD was rangebound despite the retail sales improvement at 0.6420-60, while USD/CAD pulled up above 1.1080 - an area of intraday former support turned resistance.

- Crude oil is lower on profit-taking and the commodity is looking to finish higher for the fourth consecutive week. During the US session, oil prices rose on gains in equities and better than expected US retail sales. Additionally, oil prices were supported in NY by the IEA's upward revision to its global oil demand forecast in its May report. However, the IEA noted that the latest oil price moves are not justified by fundamentals alone. In China, May crude oil output declined by 1.1% y/y. The drop in China's oil production comes as the country's crude oil imports rose in May, as Chinese refiner PetroChina said that it expects the country to import more than 50% of its crude oil needs for this year. Spot Gold has moved to session lows in Asia ,as the USD has firmed against the European majors and commodities currencies. In terms of gold demand by central banks, Russia disclosed that its gold and foreign exchange reserves rose to $409.5B in the week ended June 5 versus $401B in the prior week.

- In other market news with commodity price implications, China government continued to lash out at being passed over by Rio Tinto. Sydney Morning Herald reported that Chinese officials could implement trade sanctions against the company and BHP if their proposed iron ore jv is not approved by local antitrust bodies, who may consider the merger to interfere with fair competition practices in iron ore markets.