Asian Market Update: Equity Indices Slide to Multiweek Lows, Yen Gains Across the Board amid Ongoing Outflow from Risky Assets

- Asian equity markets tracked the accelerated final hour selloff in the US indices, opening to the downside and adding to the losses on the other side of Tokyo break as the rush for the exits has turned into a stampede. Nikkei225 extended its financials-driven declines below 9,500 - the worst level since early June - while benchmark 10-yr JGB yields fell below 1.30%. Australian markets were weighed down by energy and commodity sectors, with S&P/ASX falling over 1% to levels not seen since late April as commodity prices continued to fall in both US and Asian session. Korea's Kospi has been outperforming over the past few session on the back of strength from Samsung and LG Electronics, but fell over 1.4% amid the overall selloff in the region. Ahead of the US open, front-month S&Ps are trading down 0.3% at session lows of $877, and benchmark Treasury yields extended the decline below 3.43% - the worst level since May 26th.

- Nikkei financials sector - the leading decliner on the index - was scrutinized by some of the rating agencies. Fitch saw conditions for Japan's large regional banks remaining volatile, with loan loss charges driven by the overall health in the economy. Moreover, Fitch expressed concern over the lagging impact of loan loss charges in second half of 2009 as well as the forward-looking prospects for banks' ability to find profitable investment opportunities. A report from Moody's revealed similarly cautious tone, noting that normal functioning of capital markets and declining bankruptcies has not eliminated overall risks of deteriorating macroeconomic factors. Justifying credit agencies' caution, Japan June bankruptcies rose 7.4% after falling by highest level in 2 years in May.

- In other regional economic data tempering recovery story, Japan's May machine orders fell 3% with a third consecutive monthly decline against consensus expectations of a 2.0% increase. Japan's May current account also fell short of estimates, coming in at ¥1.3T V ¥1.5TE. In Australia, July Westpac consumer confidence rose 9.3% after 12.7% increase seen in June, while UK June nationwide consumer confidence matched its best level since October at 58 v expected 55.
Among emerging Asian economy speakers, Taiwan Finance Ministry pointed to improving domestic consumption as seen in significant increase in June auto imports, and Malaysia central Bank Governor Zeti reaffirmed her forecast that domestic growth will improve in the second half of the year.

- In company-specific news, Aeon and Tokyo Electron were among the larger Nikkei decliners. The former posted lower Q2 earnings on Y/Y basis in the prior session, while the latter was cut to Underperform at Credit Suisse. Kawasaki Kisen was also weaker after press speculation the company may report a Q1 pre tax loss of about ¥12B due to lower container fares and weaker demand for vehicle transport. In tech sector, NEC Electronics was speculated to expand its chip design operations in China, and Toyota's China sales rose 33% y/y.

- China Business News reported that local steelmakers may have finally reached an accord with iron ore miners, accepting 33% price cut terms received by Korean and Japanese firms, while also agreeing to hold biannual iron ore talks rather than accepting a full-year contract. However, as of 1amET, Chinese industry sources refuted that press speculation, noting that contract talks were ongoing.

- In currencies, Japanese Yen and US Dollar continued to benefit from widespread risk aversion, extending their gains vs European and commodity majors. USD/JPY was at lowest level since late May at 94.20, EUR/JPY briefly fell below 131, and GBP/JPY traded down to 151.50. In European dollar majors, EUR/USD traded as low as 1.3880 and GBP/USD fell to 1.6060, while AUD/USD found intraday support just above 0.7850.

- Crude oil prices are lower, tracking the declines in Asian equities. The firmer US dollar is also weighing on oil prices. Following the US equities close, API disclosed that weekly crude inventories declined less than expected, while the increase in gasoline stocks was in line with estimates (API PETROLEUM INVENTORIES: CRUDE: -1.4M V -2.5ME; GASOLINE: +767K V +800KE). In Japan, crude inventories for the week ended July 4 declined to 17.2M kiloliters from 17.3M during the prior week, while gasoline stocks fell to 2.2M kiloliters from 2.22M prior. Later on today, the US Department of Energy will release its weekly inventories data, which could give further direction to oil prices. In other oil related news, the US Commodity Futures Trading Commission (CFTC) noted during the New York session that it was mulling reforms for oil and natural gas trading aimed at lowering the systemic risk from speculators. The CFTC said that its options included setting position limits on energy futures. Spot Gold is lower at the time of writing and tracking the weakness being seen in oil prices and the commodities currencies. Some market players also believe that the decline in physical demand for gold is weighing on prices. In terms of gold market commentary, an analyst at Japan's Mitsui Global Precious Metals said that gold prices may have difficulty breaking to the upside due to the reduced trading volumes expected during the summer. Also, Mitsui Global believes that the gold market is overly long coming into the summer.