Asian Market Update: RBA minutes see downside risks contained, but expect poor employment, disinflationary trends to persist; Fed's Bernanke defends accommodative stance in WSJ ahead of House testimony

- Asian equity markets are trading predominantly higher, tracking a final hour push that saw Wall St. end Monday session at its best levels. Nikkei225 is back from holiday break and leading the major regional bourses with a catch-up rally, rising 1.4% on gains in materials and financials. Among the weaker markets, S&P/ASX is around unchanged levels following mixed RBA sentiment and Hang Seng is lower by 0.5%, while the Kospi and the Taiex are up about 0.4%. Ahead of the US session, front-month S&Ps are down 0.3% but off session lows, and bench-mark yields are back below 3.60%.

- Meeting minutes from a pair of central banks highlighted an otherwise light economic calendar session. Bank of Japan June meeting saw all of its members concur that the economy had stopped worsening and one even suggested that BOJ should consider ending unconventional policy steps. The majority was more cautious however, concluding that monthly debt buying still played a big role in dealing with uncertainty in funding supply. Many had also expected ongoing adjustment in employment sector, while some cited the threat of further decline in inflation. Recall that meeting was followed by another decision in July when the BOJ raised its economic assessment for 3rd consecutive month and extended its QE measures 3 more months through December (vs expected 6-month extension).

- Minutes from the Reserve Bank of Australia were notably more timely and slightly more upbeat. In its last July decision, RBA members concluded economic activity was better than previously expected as downside risks have diminished. The housing sector was also said to have improved while retail sales were benefited by stimulus measures. However, RBA minutes did reiterate that inflation outlook warrants scope for further easing and employment indicators were expected to remain weak for some time. Following the minutes release, S&P/ASX fell into the red to its worst levels on the day as markets heeded a downgrade of additional monetary accommodation. Earlier, Treasurer Swan also noted that the worst of the slowdown may be over, but terms of trade in Australia could continue to suffer. Recall, the most recent trade deficit saw its worst level in nearly a year at A556M.

- Over in Taiwan, the Taiex pared much of its early rally after the local press poured more water on the much anticipated investment tie-up with China. Quoting Taiwan's Ministry of Economic Affairs, United Daily News reported that Economic Cooperation Framework Agreement (ECFA) between Taiwan and China could potentially impact 3,500 businesses and result in NT$100B in annual losses. A separate Economic Daily News edition suggested that Taiwan's government is aware of the spillover impact and was mulling a fund which would be used to help domestic companies expected to be hurt by the proposed trade agreement with China.

- In equity-specific developments, several of Tokyo's auto names were firmer after Nissan announced plans to manufacture electric cars at a UK plant in the prior session and Honda called for an increase in overtime at two of its domestic plants due to rising demand for Insight, Fit, and Freed models. In Korea, Posco benefited from a Deutsche Bank upgrade in EPS as it raised its target price by 13% to KRW540K. Aside from commodity and energy sector gains in Sydney, Harvey Norman announced improved conditions, reporting overall FY sales increase of 3.8% y/y and SSS increase of 1.4%.

- In currencies, the dollar majors retreated following the early US session assault from European and commodity FX that drove the greenback to multi-week lows across the board. EUR/USD traded down to 1.42 after reaching 1.4250, GBP/USD fell below 1.65 after rising to 1.6550, and USD/CHF was back above 1.07 following a drop to 1.0650. In commodity FX, AUD/USD backed away from 0.8180 peak late in the US, USD/CAD was less volatile between 1.10-1.11, and NZD/USD bounced from intra-day support around 0.6525. Japanese Yen firmed up despite the equity gains, as USD/JPY retreated below 94.00 after trading at a July peak of 94.80 in the prior session.

- Crude oil opened the session higher and above $64/bbl. However, prices have since retreated from their best levels, tracking the declines being seen in the European major and commodity currencies against the US dollar. During the NY session, oil prices rose for the 4th consecutive session and by more than 0.50% on the advance in US equities. In terms of OPEC news, the Secretary General was quoted as saying that he expected oil prices to range between $65 and $75/bbl in 2009. The OPEC official added that the cartel would cut production at its September meeting if demand declines. At the time of writing, spot gold is little changed and prices have remained in a roughly $4.00 range for most of the session.

- Looking ahead, commodity and currency markets may receive some direction from Fed Chairman Bernanke's semi-annual testimony before the US House Financial Services Committee later today. Ahead of the speech, Wall Street Journal published a Bernanke editorial suggesting that the Fed's low-rate stance would likely be needed for an extended period of time in order to fully address the depth and breadth of the global recession. Bernanke notes that the Fed has devoted considerable time to planning an exit strategy and stands ready to tighten policy once a sustainable recovery takes hold.