Asian Market Update: Major indices and risk-related FX retreat from multi-month highs on renewed Shanghai selloff; RBA governor signals rate increase, but not in the immediate term

- Asian equity markets are trading on a slightly more cautious note in the latter part of the Friday session as traders appear to be increasingly reluctant to take long positions into the weekend amid renewed broad-based selling in Shanghai.
Regional panic took the backburner after the mainland index recovered over the prior session, helping the indices in Japan, Korea, and Australia to fresh multi-month highs earlier today. However, renewed mainland China index decline of about 2.4% restored the overall risk aversion across the board. With about 2 hours left in Tokyo trading, Nikkei225 and S&P/ASX are up only 0.7% - well off session highs - while Korea's Kospi is up just over 1% at 1,580 after rising as high as 1,595.
Ahead of the Friday US session, front-month S&Ps are around unchanged levels at 1,012, and treasury benchmark yields are around 3.60% amid signs of more appetite for government debt seen in the 10 and 30 yr auctions over the last two days.

- New Zealand June retail sales headlined an otherwise light economic calendar, coming in at 0.1% v -0.3%e to lift NZD to its highest level since September 2008 above 0.6820. In 2nd tier release from Japan, June Tertiary Industry Index also rose 0.1% v -0.3%e after a dip into the negative over the prior month. The session also saw an update from RBA governor Stevens delivering his semi-annual testimony to Parliament as well as the backward looking July meeting minutes from the Bank of Japan. Stevens largely reiterated his hawkish outlook expressed some 3 weeks ago, suggesting the unemployment would rise slower, inflation would decline less, and the recession would me more mild than expected. Furthermore, Stevens noted it would be appropriate to expect an RBA rate hike, but would not commit to the timing of the action. Overall, those comments still gave the Aussie a slight boost however, as AUD/USD rose to its best levels in nearly 11 months.

- Bank of Japan monetary policy meeting minutes for last month - traditionally a non-event that usually follows the more recent decision - did reveal some concern that a premature end to quantitative support measures could impact market sentiment. Specifically, some members said the extension of special programs beyond December was more likely if the economy did not improve sufficiently, while other noted the end would be justified if the markets saw a recovery.
Additionally, the BOJ minutes noted that corporate investment levels remained low, credit was still tight, and uncertainty over global export demand remained high. Subsequently, Japan government debt markets appeared to side with the former camp, sending JGB yields lower following the minutes release.

- Over in China, downbeat sentiment in the local press justified the heightened volatility in Shanghai. Securities Times commented on some 78% increase in "dead weight tonnage" y/y held by Chinese shipyards with comparable levels of declines in new ship orders. Likewise, Shanghai Securities News speculated on the extent of demand for iron ore in the context of industrial restocking, noting that China's minister of industry and information technology requested that steel mills do not expand capacity with new facilities in the next three years.

- In notable equity news, Leighton led the outperforming industrials sector in Sydney, rallying sharply after its FY09 results. Net profit fell short of estimates, but sales were seen at A$18.3B v A$17.8Be, while FY10 guidance was also better than expected on top and bottom line. In Tokyo, Mitsubishi UFJ raised its outlook on Kawasaki Kisen and Elpida Memory firmed after Taiwan press said Taiwan Memory could raise up to NT$18B to buy a stake in the company. On the Kospi, Korean Air reported Q2 Net loss KRW79B v loss KRW226Be, Op Loss KRW127B v Loss KRW23Be, and Rev of KRW2.1T v KRW2.2Te.

- In currencies, the gains made against the greenback by European and commodity majors were scaled back as fresh Shanghai panic sank market optimism. EUR/USD bounced lower to 1.4250 after briefly rising above 1.43 and GBP/USD retreated from 1.66 to 1.6550. In commodity FX, AUD and NZD retreated to unchanged levels around 0.8420 and 0.6780 after rising to multi-month highs above 0.8470 and 0.6820 respectively. Japanese Yen was unchanged vs commodity FX but firmer against US and European majors, with USD/JPY and EUR/JPY falling as low as 95.05 and 135.55.

- Crude oil prices opened the Asian session higher, but have since pared their gains on the rebound in the US dollar and early selling in Chinese equities. During the US session, oil prices closed higher by 0.5% in floor trading. This week's gains in equities leave oil prices on track for the 5th consecutive weekly gain. Like oil prices, Spot Gold has pared its gains on the session. During the NY session, gold rose by more than $3.50/oz and closed above $956/oz on the COMEX. In other commodities trading, Shanghai Copper has risen by more than 2% on today's session and has moved to the highest level since late Sept. Chinese copper prices are tracking the earlier gains in the LME contract. On yesterday's session, LME copper rose to a 10-month high, supported by better than expected German and French GDP data.