Asian Market Update: Shanghai recovers as rumors of lending constraints are downplayed; Yen slides on risk appetite, shrugs BOJ's Mizuno call for QE cap

- Asian equity bourses have staged an impressive rebound, tracking the gains in the US markets that hardly resonated the prior session's Shanghai slump. With just about 90 minutes to go in Tokyo, the Nikkei is trading up 1.3% near session highs amid an overall retreat in Japanese Yen. Shanghai Composite is leading the way with a 2.1% rally, while Korea's Kospi is up nearly 1%. S&P/ASX and the Taiex are weighed down by local factors, but also trading well off session lows at +0.2% and -0.6%. Australia markets fell after the Senate passed renewable energy reform, while Taiwan was mired in political aftermath of the typhoon leading to calls of a cabinet reshuffling. Ahead of the Thursday US session, front-month S&Ps are back above 1,000, up 0.3% ahead of the weekly jobs and Philly Fed manufacturing data.

- With virtually no economic data, markets took note of a reversal in Shanghai Composite, where the sharp selloff over the course of yesterday's session took the index down 20% from its multi-week high. Shanghai rallied over 2% from the get-go, spurred by bullish commentary from fund managers and financial press suggesting the recent selloff has been overextended. Analysts from several major financial institutions remained optimistic that China's stimulus can still power the region to outperform other economies. Meanwhile, Financial Times reported on the prevalent worries that Chinese officials are looking into reducing bank lending so as to deflate the speculative equity bubble. The article noted that the feared meeting between Vice Premier Wang and regulatory banking authorities rumored to address tightening of credit was in fact never scheduled.

- Over in Japan, central bank's Mizuno was increasingly more cautious regarding the recent upturn, noting that output and export recovery could slow in the fall. Moreover, he said the global economy was still fragile, while Japan's growth potential could still be under 1%. Despite the downbeat outlook, Mizuno expressed further opposition to extending the unconventional policy for too long, suggesting that it would distort markets and actually impede the progress of recovery.
The perceived talks of ending or revising unconventional policy steps helped contain the overall session decline for the Yen, with Japan's currency rallying on the heels of Mizuno comments. Elsewhere in Japan, the Sr DPJ officials reiterated they would refrain from currency intervention if the party comes to power after the upcoming general elections. Earlier, local press said the opposition DPJ could win as many as 300 of the 480 parliament seats, while the ruling LDP could win fewer than 150 seats.

- In equities, Ebara gained 9% after Japan's Ministry reportedly said it would provide subsidies to help the company and 4 other firms develop parts used in nuclear reactors. Sumitomo Metal gained 4% after acquiring a minority stake in Philippine's Nickel Asia, while Japan's 2nd tier carmakers Mazda and Isuzu rallied 2% and 5% on more auto sector brokerage upgrades. Outside the Nikkei, a number of Australian companies reported a mixed set of earnings ahead of the key session report from Rio Tinto. Lend Lease fell nearly 7% after posting FY09 net loss of A$653.6M v expected profit of A$303M. In financials, Wesfarmers was also down as much as 5% after reporting FY09 net A$1.54B v A$1.65Beon revenue in line with A$51.2Be. On the upside, energy firm Santos topped estimates at 1H Net A$101.7M v A$67.3Me on Rev A$1.05B v A$1.04Be, rallying 7% before returning toward unchanged levels. Santos also issued upbeat guidance, noting the second half earnings would improve further. Earlier in the session, Australian Financial Review said the vast majority of companies that already reported earnings outperformed expectations, leading to rising analyst confidence.

- In currencies, European and commodity majors consolidated their gains vs the greenback while also punishing Japanese Yen amid the overall risk appetite theme for the session. EUR/USD ranged at 1.4210-60 and GBP/USD traded between 1.65-60, while AUD/USD tracked slightly firmer above 0.83 and USD/CAD remained below 1.10 on oil rally driven loonie rally. Japanese Yen was lower across the board, with USD/JPY rising to 94.40 - up 60 pips from intraday lows. In the crosses, the Yen declined to 134.40 vs EUR, 156.20 vs GBP, and 78.40's vs AUD.

- Crude oil prices have swung between gains and losses in Asia as markets continues to look to Chinese equities for direction. During the NY session, oil prices were supported by the weekly Department of Energy inventories data, which showed that crude inventories dropped by the most in more than a year (DOE CRUDE: -8.4M V +1.2ME; GASOLINE: -2.2M V -1.7ME). Looking ahead, crude may continue to track equities markets and could be impacted by the later today releases of US corporate earnings, US weekly initial jobless claims and US leading indicators data. Spot Gold is marginally higher and trading above $940/oz, after declining in NY trading. In terms of physical demand for gold, the SPDR Gold Trust's holdings of the metal have remained unchanged since the ETF cut its holdings by 3.1 metric tons on August 11. Yesterday, the World Gold Council reported that in Q2 gold demand fell by 9% y/y to a 6-year low of 719.5 tons. In Q2, Indian jewelry demand declined by 31% y/y, while Chinese jewelry demand rose by 6% y/y. In terms of global investment demand, US demand rose by 10% y/y and Chinese demand rose by 9% y/y. Shanghai Copper has risen by as much as 3% on today's session, as the Shanghai Composite ended the morning session in positive territory. Chinese copper prices are also being supported the 76% y/y rise in Chinese air conditioner sales in July. According to one estimate, air conditioners make up approximately 17% of domestic demand for copper in China.