Asian Market Update: Risk Aversion Sinks Asian Bourses Despite Cautious Optimism from BOJ and RBA; USD, JPY Extend Gains vs European, Commodity Majors

- Asian equities are tracking the broad selloff on Wall St. with buyers fleeing the risky assets in favor of safehaven treasuries in droves. With about 90 minutes to go in Tokyo trading, Nikkei225 is down 2.6% near the session's worst levels. S&P/ASX is off by 1.7% on strength in the greenback weighing on commodity-driven names. In Korea, the Kospi decline is at about 1%, while Hong Kong is at the forefront of the selloff, shedding over 3% on the Hang Seng. Investor capital flowing out of the equity and commodity markets is finding its way back into govt fixed income, sending US benchmark yields below 3.7% and JGB yields lower as well.

- Equity market and the overall risk-related slump also seen in currencies and commodities has overpowered some of the cautious optimism expressed by central banks of Japan and Australia. As expected, the BOJ kept interest rates unchanged at 0.10% but raised its economic assessment for the economy for the second consecutive month. Although Bank of Japan did not scale out of its ¥1.8T purchase of govt bonds, it did note that the economy has stopped worsening, forecasting a recovery to take place in the 2nd half of the fiscal year. Specifically, BOJ noted that exports and output were turning higher, and financial markets, while still somewhat tight, were showing signs of improvement.

- Reserve Bank of Australia released its June meeting minutes, commenting on certain indicators tracking toward the stronger side despite the high degree of uncertainty on the extent of global recovery. The RBA remained vague in terms of the need for additional easing, suggesting that some room remains if needed from the demand standpoint, but did see improvement in housing and retail sectors. On the downside, RBA expected unemployment to continue rising and inflation to trend lower over the near term. Overall however, RBA sentiment did seem to suggest that no imminent rate cuts were warranted by the current conditions.

- Among some of the notable speakers in the region, Australian PM Rudd suggested the govt would look to enhance bank competition, presumably in reference to CBA decision to raise its lending rates last week. New Zealand Finance Minister English contradicted some of the recent RBNZ concerns, noting that interest rates were falling and credit was expanding. On a related note, RBC research forecasted RBNZ rates to remain on hold at 2.50% despite the bank allowing for possibility of additional easing at its most recent June 10th meeting. Elsewhere, China's Vice Commerce Minister Ziying said China should provide more support for exporters by increasing tax refunds and improving credit insurance, and Malaysia's Finance official forecasted Q2 GDP contraction comparable to Q1's 6.2% decline, not anticipating a return to growth before Q4.

- In share-specific developments, energy and basic materials sectors led the bourses lower across the board. In Sydney, miners Rio Tinto and BHP were down 4% and over 1% respectively, while oil names Woodside and Santos declined 2%. Gold producer Lihir stuck to its FY09 production forecast but still fell 2% after gold extended its decline below $930 during US trading hours. Among the Nikkei movers, Konica Minolta and Sanyo Electric fell 6% and 2% after being cut to Underperform at Credit Suisse and Mits. UFJ. In the auto sector, Nissan and Toyota were down 4% and 3% on JPY strength and overall negative sentiment despite the Japanese press reports suggesting the two companies were looking to raise production of small cars in Europe in response to recovering demand.

- In currencies, foreign officials continued to jostle over the role of the greenback as a global reserve choice. Japan's Fin Min Yosano reiterated his confidence in USD remaining a key reserve currency. However, Russian President Medvedev has contradicted a similar statement from his Finance Minister Kudrin in the prior session. Speaking on the eve of the BRIC meeting in Russia, cabinet aide suggested that the question of USD being a reserve currency will in fact be raised during the talks between emerging economy leaders. Overall on the session however, the markets did see renewed interest in USD and JPY buying amid broad-based risk aversion. EUR/USD briefly traded below 1.3750 before turning higher after Medvedev cabinet comments, GBP/USD fell below 1.6220, and USD/CHF rose as high as 1.0955. Japanese Yen was the clear winner across the board, with USD/JPY and EUR/JPY falling over 150 pips to session lows around 96.30 and 133.20. Commodity FX was also severely punished, as AUD/USD fell as low as 0.7860 and USD/CAD rose to US intraday highs around 1.1370.

- Crude oil is lower in Asia, after briefly dipping below $70/bbl earlier during the session. Crude oil prices are tracking the weakness in Asian equities and the firmer dollar. In terms of OPEC commentary, during the US session OPEC's Secretary General said he does not want oil prices to rise too rapidly and that OPEC would consider raising output if crude stocks decline and demand rises. Spot Gold is higher on today's session, after dropping in NY trading on the gains in the US dollar. In other commodities trading, Shanghai Copper prices are declining for the 4th consecutive session, in line with the losses seen in the LME copper contract.