Asian Market Update: China Q2 GDP Slightly Higher that Expected, but Inflation Trends Remain Poor as Official Outlook Stays Cautious; Fitch Cuts New Zealand Sovereign Outlook Despite Strong PMI as Kiwi Plummets

- Asian equity markets have put up a second consecutive session of stellar gains that are in concern with US, where both S&P and Dow rallied 3% in Wednesday session in the wake of solid earnings from Goldman and Intel earlier this week.
Asian bourses have also cleared the hurdle of economic data barrage, where mixed results did produce some mild risk aversion but could not keep the bulls at bay. Nikkei225 is off session highs on the other side of the midday break amid JPY strength following Chinese GDP, but still shows a firm 1.7%, S&P/ASX is at the front of the rally with a 2.2% materials-led gains, followed closely by Hang Seng at +2.1%. Taiex and Singapore Straits Times is up over 1%, while Korea's Kospi is the laggard after prior session's outperformance with a 0.8% gain. Ahead of the US session, front month S&Ps are down 0.5% at $922.40 after the cash market approached 2009 highs in the prior session.

- Q2 GDP, along with June inflation, industrial production, and retail sales data out of China marked the key economic set of data on the session. Q2 GDP was in line with leaked by the press 7.9%, slightly higher than 7.8% expected and well above 6.1% in Q1. On YTD basis, GDP rose to 7.1% from 6.1%. In other data, industrial production was well above forecast of 9.5% at 10.7%, and Retail Sales growth was in line with estimates at 15.0%. On the down side, June inflation figures were poor, falling at multi-year record pace as PPI dropped -7.8% y/y and CPI declined -1.7% vs respective estimates of -7.4% and -1.3%. Speaking after the release of these figures, China's govt stats office conceded that the momentum of economic recovery was still not particularly stable, pledging to keep proactive fiscal policy and moderately loose monetary policy as overcapacity in certain industries and employment sector weakness remained problematic.

- In other notable economic data, New Zealand posted a mixed set of inflation numbers and strong Business PMI, helping the Kiwi strengthen early in the session. Q2 CPI rose 0.6% v 0.5% expected and June PMI rose to 46.2 from 43.1 in May, posting the first 2009 expansion in New Orders and Highest level this year in production. Subsequently however, Fitch reversed the relative Kiwi gains with a downgrade for New Zealand sovereign rating outlook to negative, citing fiscal imbalances and the threat of a low-growth trap.

- Elsewhere, Singapore Trade Minister cheered the strong recent GDP data and official upward revision in growth forecasts, noting that the government does not need to introduce more stimulus because the economy is stabilizing. In Malaysia, MIER said local economy may contract 6% in Q2, but Malaysia central bank still did not need to cut rates with contraction slowing to -4% in Q3 and Q4 possibly rising to +2%. On the political front, Japan's PM Aso continued to lose political allies, with Finance Minister Yosano becoming the next voice in calling for his resignation. Over in Australia, local press suggested that PM Rudd has increased pressure on China's authorities regarding detention of 4 Rio Tinto employees, suggesting the detainment bodes poorly for China's economic interests. On a related note, another press report saw Rio Tinto pulling some of its research employees out of China.

- In Japanese equities, shippers Nippon Yusen and Mitsui OSK were rumored to miss estimates with pretax losses in Q1 and also targeted by Moody's, who said the sector was possibly facing a downgrade. In tech, Japanese press also said Canon could miss Q2 operating profit estimate of ¥47.9B, posting ¥30B figure - rumor that the company refuted. Antitrust regulators issued a sobering statement for Kirin Brewery noting that its merger with Suntory is subject to inspection. In the auto sector, Mazda was up by over 10% after press speculation that Toyota would supply key core components for its hybrid vehicles planned for launch in 2013 - report that Toyota had since refuted. Outside the Nikkei, Goldman Sachs reportedly raised its profit outlook for Rio Tinto, Sino Gold rallied on strong output results for June, while Samsung was requested to comment on press speculation it was planning to expand its LCD line.

- In currencies, the dollar and JPY advanced moderately after mixed economic data from China and a cautious assessment by the govt stats office. EUR/USD retreated below 1.41, GBP/USD broke under 1.64, and USD/CHF rose as high as 1.0780.
Commodity FX was hurt even more as AUD/USD fell 60 pips to 0.7980 and USD/CAD broke above 1.12 with an 80 pip rally. Kiwi dollar was hurt the most by the Fitch outlook revision, plunging 110 pips from 0.65 session high below 0.64. Japanese Yen broke to the downside of 94.00 against USD, 132.00 against EUR, and 154.00 against GBP, rallying by over 100 pips in cross pairs.

- At the time of writing, crude oil prices are little changed and trading above $61.00/bbl. In US trading, oil prices closed higher by more than 3%. Oil prices were supported by the Department of Energy's weekly inventories figures, which showed that crude stocks declined more than expected (DOE CRUDE: -2.8M V -1.7ME). In OPEC news, an official form Kuwait was quoted as saying that the cartel would likely cut supplies if oil moved under $55/bbl. The Kuwaiti official added that oil prices may rise to $100/bbl in 2010 due to the weaker dollar. In early July, Kuwait's Oil Minister Sheikh was quoted as saying that he hoped that oil prices did not hit $100/bbl in the second half of 2009 on concerns that it would lead to another recession. Spot Gold is lower by more than 0.10% and is tracking the declines in the European major and commodities currencies against the US dollar. During the NY session, gold prices rose more than $16.00 on a combination of factors including the weaker dollar, rise in US equities and higher than expected US consumer price data.