Asian Market Update: Kiwi Q1 GDP Contracts at Sharpest Level in Years; Pace of Japan Deflationary Spiral Accelerates to Record Highs; Equities See Additional Gains while Greenback Continues Selloff

- Asian equities are firmer in latter part of the week's final trading session in Asia, but the rally is notably more muted than the gains seen on Wall Street or the advance of the prior session. With 2 hours till close, Nikkei225 and Taiwan's Taiex are up 0.7% on the day, Hang Seng and S&P/ASX lead the rally with over-1% gain, while the Kospi is marginally higher.
Spurred by rising oil prices and recent signs of accommodative global central bank bias, energy and financial sectors led the way across the bourses, while techs were generally weaker. Going into the US Friday session, front-month S&Ps are near session lows down 0.4% around $913, with benchmark yields recovering to about 3.57%.

- Despite the upbeat equities, regional economic calendar was rife with bad news, as New Zealand posted its worst GDP decline in at least 15 years while Japan slid further down the slippery slope of deflation. New Zealand Q1 GDP came in at -2.7% v -2.3% expected on Y/Y basis and -1.0% v -0.7% expected on Q/Q basis, with Q/Q deflator leading the slump by falling to 1.0% from 2.9%. Over in Japan, April national CPI fell 1.1% on both headline and core level. Downward price pressure was the worst since record-keeping began in 1970, prompting Finance Minister Yosano to urge more efforts to keep Japan from falling into deflationary spiral and prop up internal output and demand. Cabinet office chief economist echoed the warning, noting deflation would undermine the feeble economic recovery. New Zealand Finance Minister used the opportunity of weak GDP to step up the administration assault on strong currency, suggesting the weak exports represented a "handbrake" on the economy.

- In other regional macro developments, China's Sr state economist was upbeat on domestic growth, forecasting Q3 GDP over 8% and Q4 GDP above 9%. This follows recent China upgrades from OECD and IMF as well as Barclay's. Today's industrial sector figures were also supportive of the optimism, with May Industrial profits coming in at -22.9% v -37.3% prior. In 2nd tier economic data, Japan's April All Industry Activity Index was 2.6% v 2.1%e and Korea' Current Account was $3.63B v $4.25B prior.

- With hard commodities showing pronounced strength across the board, talks of Australia-China tie-up in materials sector have resurfaced. After rejecting rumors on Fortescue, China's Minmetals said it would still consider acquisitions in Australia at the appropriate time. On a related note, Oz Minerals was rumored to be a potential takeover target in a JP Morgan research note. Separately, Canada's Potash has cut its guidance for Q2 to $0.70 from $1.10-1.50, reflecting a substantially lower sales volume as well as global deferrals amid lower realized phosphate fertilizers prices.

- In other equity news on the Nikkei, Suzuki rose about 5.5% following earlier press speculation that Volkswagen is considering acquiring a 10% stake. In other Japan industrials, Bridgestone rose 7% after upping its 1H guidance and Komatsu rallied by near 1.5% in late session after citing improving demand for machinery from China markets. In tech, Panasonic was rumored to be near completion for Sanyo Electric, while utility Mitsubishi Electric had its rating outlook revised to negative by Moody's. Energy companies Inpex and Nippon Oil saw its sector outperform on higher crude prices but also rose on speculated acquisition of oil field development in Southern Iraq.

- In currencies, the dollar remained under pressure across the board, as European and commodity majors rose to the upper sector of their 2-week ranges. EUR/USD rose as high as 1.4060, GBP/USD rallied to 1.6440, and USD/CHF continued to defy SNB intervention with a decline below 1.09. In commodity FX, AUD rose to 0.8070, USD/CAD fell to 1.15, and NZD/USD pared much of the post-GDP drop by retesting 0.6450. Japanese Yen traded sideways vs USD despite the equity rally however, rising to 95.70 before retreating to 96.00 handle.

- Crude oil prices are higher in Asia, tracking the gains on the Nikkei 225 and the weaker dollar. Crude oil prices are also being supported by geopolitical concerns in Nigeria as it was reported during yesterday's European session that Royal Dutch Shell's Krakrama pipeline had been attacked. Additionally, it was reported yesterday that Exxon shut the gasoline unit at its Baytown refinery (567K bpd) in Texas for repairs following a pump failure, which resulted in the release of hydrogen sulfide. Spot Gold prices are higher on the weaker dollar, but gains have been so far capped on today's session around the 943.40 level. In terms of gold demand, the SPDR Gold Trust ETF disclosed that its holdings declined by 0.5% to 1,125 tons as of June 25. Overall, gold prices are on track to close the week higher for the first time in 4 weeks.