Asian Market Update: Concerns over China powering global recovery weigh on Asian markets; AUD continues to underperform while JPY retains the lead on risk aversion; Crude declines for fourth consecutive day

- The caution seen in Asian equity markets in the wake of the disappointing July economic data from China has morphed into a broad-based selloff, as commentary from a number of widely followed analysts and state officials expressed concerns over the durability of China recovery. With just about 2 hours to go in Tokyo trading, Nikkei225 is at session lows down 1.4%, Korea's Kospi is off by 1.6%, and indices in Hong Kong and Shanghai are lower by over 2%. S&P/ASX and Taiex are seeing less pronounced declines, but still trading down just over 0.2%. Energy and consumer goods sectors are leading the other decliners as crude prices continue to fall and worries over long-term recovery of consumer confidence resurface. Ahead of the Fed decision day in the US, front-month S&Ps are off session highs around unchanged levels, while benchmark treasury yields remain pressured below 3.67%.

- In London, Ambrose Evans-Pritchard said the most recent data raises doubts about the strength of global trade and whether China can meet rising expectations of powering global economic recovery beyond its generous stimulus CNY4T.
Specifically, he points to the recent drop in the Baltic Dry Index - the index has declined for 9 consecutive days - as indicative of a drop-off in Chinese restocking of commodities, with the recent bounce in equities attributed to added liquidity sparking speculative flows. On a related note, Chinese Vice Trade Minister Fu suggested that iron ore imports may be somewhat "too high", and while foreign direct investment showed positive signs, conditions remained severe. Additionally Commerce Ministry said China is still facing pressure from weak overseas demand, and stimulating domestic demand could not offset the export slump. Over the prior session, Pimco's El-Erian expressed similar views in the FT, calling the stimulus-driven rally "transient" and urging investors to look for signs of recovery in domestic demand, while forecasting greater protectionism by advanced economies.

- Economic calendar was fairly light, with some second-tier data seen from Australia, Japan, and Korea. In Sydney, Q2 wage cost index was in line with estimates at 0.8% q/q and 3.8% y/y. Consumer confidence as measured by Westpac survey reached its highest levels in nearly 2 years however, helping S&P/ASX outperform the other regions. South Korea's unemployment rate fell back to 3.8% from 4.0%, alleviating concerns by President Lee expressed in the prior session when he said that employment, investment, domestic demand were still far from a recovery. Elsewhere, Korean Finance Minister Yoon noted a policy of greater labor market flexibility should still be pursued as employment conditions remaind challenging. In Japan July Corporate Goods Price Index rose for the first time in 11 months on m/m basis, up 0.4% v 0.0% expected.

- In notable equities, Nisshin Steel rose 5% on Merrill upgrade to Buy and Sapporo gained 4% after Nikkei report the company may buy a 20% stake in beverage maker Pokka. Outside Tokyo, Australian miners Rio Tinto and BHP were down around 1% on China demand worries, while Fortescue Metals replied to speculation of a capital infusion from CIC that talks were still incomplete. Note, BHP is expected to report its FY results after the market close. In Sydney's financial sector, CBA reported FY09 Net at A$4.7B v A$3.8Be and Sales A$39.4B v A$17Be, also planning to offer A$700M in hybrid securities. The bank also said outlook was still uncertain even as signs of improvement in global environment did emerge.

- In currencies, Australia Dollar was once again the biggest loser of the session while Japanese Yen continued to benefit from growing risk aversion. AUD/USD fell about 50 pips below 0.8250, AUD/JPY was down another 100 pips below 78.70, while USD/JPY fell below 95.50. JPY also strengthened by about a big figure in the crosses, with EUR/JPY and GBP/JPY falling below 135 and 157.30 respectively. European majors ranged against the greenback ahead of the Fed decision, with EUR/USD bouncing around 1.4150 and GBP/USD contained by 1.65 handle.

- Crude oil opened the session higher, but has since moved off of its best levels. Oil prices were initially supported by the bullish US API inventories data (API PETROLEUM INVENTORIES: CRUDE: -1.42M V +1ME; GASOLINE: -2.26M V -1.2ME), but the rebound in the dollar and Asian equity decline has weighed on the commodity. In NY trading, oil prices declined by more than 1.5% and closed below $70/bbl for the first time since July 31. Some in the market are shifting focus from whether the global recession has ended to how strong any rebound will be, which has implications for oil demand. In terms of oil demand, OPEC left its 2009 global oil demand forecast unchanged at -1.65M bpd in its July report. OPEC added that US oil consumption is still showing a massive reduction. As the US hurricane season begins to heat up, the US National Hurricane Center said a tropical depression has formed near West Africa, which could become the first tropical storm of the Atlantic hurricane season. Looking ahead, the upcoming Fed decision and weekly Department of Energy inventories data could influence the future direction of oil prices. Spot Gold has pared its gains and is trading firmly below $950/oz, as markets await the upcoming FOMC statement. In terms of physical demand for gold, the holdings of the SPDR Gold Trust ETF declined by 3.1 tons to 1,065 tons. The ETF has now pared its holding of gold for 3 consecutive sessions.