Asian Market Update: Fortescue undercuts other miners with China pricing agreement; Japan emerges out of year-long recession with positive Q2 GDP; AUD extends losses as JPY rallies across the board

- Asian equity markets are trading sharply lower across the board in the wake of a Friday sell-off on Wall St., where a week of disappointing consumer sentiment and retail sales has forced investors to recalibrate the slope of US economic rebound.
In spite of Japan emerging out of a year-old recession with a positive Q2 GDP, Nikkei225 has shed over 2.5%, with decliners led by financials, tech, and energy sectors. S&P/ASX is off by 1.8% on a selloff in materials following limit-down trade in Shanghai Copper and Fortescue price deal with China. Shanghai Composite has also extended its August slump with another 3% selloff, while Korea's Kospi is off by % and Taiwan's Taiex is down by %. Ahead of the Monday open in the US, front-month S&Ps are down about 0.7% below $1,000.

- The centerpiece of the Asian session's economic docket, Japan's Q2 GDP rose 0.9% as the economy leaped out of a year-long recession. The figure marked a first expansion since Q1 of 2008 and the widest pace of improvement since early 2007. Marked improvement was seen across a number of sectors, as private sector consumption, public sector investment and exports all posted impressive gains. Speaking after the release of the GDP, Japan's Economic Minister Hayashi said the impact of government stimulus is evident in GDP consumption components, noting that the economy is likely to improve further, potentially exceeding official government forecasts.

- In other regional economic data, China July foreign direct investment declined 20.3% - worse than -16.8% expected and -17.9% prior. Over in New Zealand, July Services PMI registered its first expansion in 15 months at 50.1 v 45.0 prior.
Employment component improved 4.3 points to 47.9, new orders rose nearly 6 points to 56.5, and supplier deliveries came in 4 points higher at 46. Despite that improvement, New Zealand tourist ministry officials tempered optimism for a major Kiwi services sector, citing forecasts from nearly half of tourism companies calling for a decline in activity over the coming 3 months.

- In equity news, a second-tier Aussie miner Fortescue Metals undercut the ongoing negotiations between the larger miners (Rio Tinto, BHP, Vale) and Chinese steelmakers, striking a deal with China's Baosteel on 2009 and 2010 contract prices.
Fortescue agreed to a 35% cut y/y - larger than the 33% cut agreed to with Japan and Korea that was initially rejected by China - effective from July 1 through the end of the year. In addition, the agreement stipulates as much as $5.5-6.0B equity investment in Fortescue, with financing expected to be closed by Sept 30. In the wake of the announcement, Fortescue rallied nearly 7%, while BHP and Rio Tinto, who said the agreement does not impact its own discussions with China, were down 2% and 3% respectively. On a related note, industry analysts forecasted that China's leading steel companies could report 1H declines in earnings to be reported this week. Elsewhere in Australia, gold producer Newcrest rose 2.5% after posting better than expected FY09 earnings and raising its full-year dividend. Bluescope Steel results were largely in line with forecasts of a narrow loss, and the company had also cancelled its yearly dividend, leading to a 4% slide in its shares.

- Among some of the notable speakers, Australia's Treasury Secretary Henry painted a dimmer for the local economy, noting that the next phase of growth may not be as favorable in some of the other advanced economies while acknowledging a greater budgetary need to scale out of the fiscal stimulus. Separately, Fitch said Australian REIT results are expected to continue showcasing the impact of declining asset values. In Malaysia, IMF saw limited room for additional central bank policy easing, even as a growing number of economists expect Malaysia to have registered a bottom during Q1, forecast return to growth as early as Q4.

- In FX, Australian dollar was once again the most heavily sold major currency, as Japanese Yen and USD extended their broad-based gains in wide-spread risk aversion. AUD/USD fell from 0.8320's to 0.82 and AUD/JPY fell over 150 pips to 77.50s, while EUR/AUD and GBP/AUD rose over 150 pips above 1.7220 and 2.00 respectively. In European dollar majors, EUR/USD fell over 50 pips below 1.4150, GBP/USD declined over 100 pips below 1.6430, and USD/CHF rallied about 50 pips to 1.0770. On a relative basis among the leading currencies, JPY was slightly firmer against the greenback, with USD/JPY falling nearly 50 pips below 94.50. JPY was also sharply higher against EUR and GBP, as EUR/JPY and GBP/JPY fell to their lowest levels in the month of August below 134 and 156 respectively.

-Most commodity prices are lower on today's session due to the firmer dollar, lower equities and demand concerns. After closing Friday's session well below $70/bbl, crude oil prices saw follow-through selling on today's session and at one point moved below $67/bbl. Spot Gold prices are lower and trading well below $950/bbl. In China, Shanghai Copper and Zinc have declined by their 5% daily limits, tracking Friday's losses in LME base metals. On Friday's session, the weaker than expected US Michigan confidence data led to declines in LME base metal prices. Additionally, weekly Shanghai Futures Exchange copper stockpiles rose to the highest level since Aug 2007 in the prior week.