Asian Market Update: G8 Welcomes Signs of Stabilization but Tempers Overall Optimism; USD Rallies on Affirmed Reserve Status by Russia

- Major Asian bourses are scaling back the gains made for much of last week that took Tokyo and Sydney markets to their multi-month highs. Nikkei225 and S&P/ASX were off by nearly 1% in late session trading, Kospi dropped over 1.5%, and Taiwan's Taiex hit multi-week lows with a near 4% slide on carried-over freefall. Investors are heeding cautious sentiment from the weekend's G8 summit, where rhetoric from finance ministers fell short of expectations of stimulus exit strategy discussions in view of a pronounced global recovery. Instead, although the summit communique did acknowledge some signs of stabilization, economic leaders pledged to maintain focus on the ongoing crisis and banking sector credit conditions while also warning on further rise of unemployment. Specifically, US Treasury Secretary Geithner saw global economy as being in transition into a "slowing rate of decline" and said it was too early to switch demand-oriented policy focus to supply. Likewise, UK Chancellor Darling saw good progress in domestic economy with more time needed before a full recovery and German Finance Minister Steinbrueck expecting a very moderate improvement taking a long time to materialize.

- Regional economic docket is expected to be light for much of the week and saw a single 2nd tier release out of New Zealand. Q1 Manufacturing activity came in better than expected -1.0% decline at -0.9%, but was still at the lowest level since Q3 of 2007. Among notable speakers, China Ministry of Commerce took on a softer tone in the wake of Rio Tinto snub of Chinalco, noting that failed deal would not impact trade ties between China and Australia. New Zealand PM Key urged banks to pass on lower borrowing costs to lenders. Recall the regional banking sector was shocked last week when Australia's biggest lender, Commonwealth Bank of Australia, decided to raise it rates by over 1%, sparking concerns about continued central bank easing that sent AUD and NZD lower. Aussie Treasurer commented on govt fiscal stimulus program, rejecting speculation of consumption taxes being raised. Elsewhere in Asia, former PBOC advisor Li Yang offered a downbeat forecast for the medium term, noting that at least 5 years would be needed to get over the W-shaped recession, with another leg down coming once the fiscal and monetary stimulus impact wore off. In South Korea, Finance Minister Yoon reflected on signs of stability in currency and equity markets but expressed some caution over domestic demand and employment conditions remaining weak.

- In market-specific developments, the slide in hard commodity prices seen on Friday impacted Aussie miners as BHP fell over 2% from the opening bell and Fortescue Metals pared its recent gains with a broad decline. Overall, the materials sector led S&P/ASX lower. In Tokyo, tech sector led the decliners, although some of the auto names received a fair share of press. Toyota was speculated to have taken steps to increase its productions of nickel-metal hydride batteries for hybrids, presumably on better than anticipated demand for its Prius models. Recall the new issue had taken over from Honda's Insight as the most coveted vehicle in the local market. In turn, concerns over missed Insight sales targets for the year weighed on shares of Honda, which traded down 2% for much of the session relative to Toyota's initial 2% rally.

- In currencies, the greenback received a boost of confidence from Russia, while the Euro was damaged by press speculation over deepening credit crisis in Germany. Backing away from recent questions over the role of USD as reserve FX, Russian Fin Min Kudrin said the Dollar role in world is unlikely to change significantly in near future and Russia has full confidence in dollar, pledging to continue to hold USD as reserve currency. Additionally, Kudrin suggested it was too early to discuss any other alternative to USD as reserve currency. Likewise, Kremlin aide Prikhodko noted that the leaders of the BRIC nations are not planning to discuss prospects for new global reserve currencies at their summit on Tuesday. Recall last week Russian President Medvedev reiterated his support in new reserve currency structures. IMF Strauss Kahn was also more upbeat on USD, suggesting it is not weak and valued correctly by the market. Meanwhile, the London Telegraph feature quoted President of German Chamber of Commerce forecasting resurfaced effect of liquidity crunch threatening the survival of companies. EUR/USD fell to 1.3910, GBP/USD approached Friday low of 1.6340, and USD/CHF approached 1.0850. In commodity FX, USD strengthened against AUD and CAD to 0.8030 and 1.1250 respectively, while USD/JPY ranged around 98.00-98.50.

- Crude oil is lower by nearly 1% and trading below the $71.50/bbl level. Falling Crude prices are tracking the firmer dollar and the decline in Asian equities. Initially, crude oil prices have failed to benefit from Iran's disputed election results.
According to Iranian state media, the current President Ahmadinejad is claiming that he won 62% of the votes. However amid protests, the opposition candidate Mousavi is disputing the claims of Ahmadinejad. A senior US official said the United States was not yet ready to pronounce the result of the Iranian election. In terms of OPEC news, Algeria's oil minister said that he sees oil prices moving to $90/bbl by 2010, after noting in late May that he believed the fair price for oil was $70/bbl. Also in its June report, OPEC cut its 2009 oil demand forecast to -1.62M bpd from -1.57M bpd. Spot Gold is lower, but off of the session's worst levels which were around $935/oz. Today's gold price decline is tracking the gains in the USD against the EUR and commodities currencies. In other gold related news, the G8 Finance Ministers' joint statement noted that the G8 was looking at ways to boost IMF lending through gold sales, after the G20 previously approved the IMF selling 403 tons of gold. With respect to the technical outlook for gold prices, one market player is noting possible support around $930/oz.