Asian Market Update: Nikkei225 rises to 10-month highs and Shanghai Composite recovers more lost ground, while Taiwan underperforms on political turmoil

- Asian equity markets remain substantially more manic than their US counterparts, staging a pronounced rally after an extreme selloff yesterday relative to the far more subdued two sessions seen on Wall Street. Led by telecom and financials sectors, Nikkei225 soared coming out of midday break, rising above 10,630 to a fresh 10-month highs. After the initial decline, Shanghai Composite entered its own lunch break on a high note, trading up by 1.5%. S&P/ASX was boosted by strong earnings reports from gold producers, while Hang Seng and Kospi picked up about 0.5% amid overall regional strength. Taiwan is the only decliner on the day, losing 1% after reports that another one of the administration's cabinet members is considering resignation, as the political aftermath of the recent typhoon continues to weigh on the island's financial markets. Ahead of the Wednesday session in the US, front-month S&Ps are up 0.2%, with yet another forecast improvement in the US housing sector data.

- Japan's July trade balance marked the primary economic event of the session, falling slightly short of expected ¥390B surplus. Coming off a 15-month high in June, the ¥380B July surplus was also below the prior ¥508B figure. Declines in both imports and exports were better than expected however, registering declines of -40.8% and -36.5% respectively. In second-tier economic reports, Japan's July Corporate Service prices were in line with estimates, declining 3.4%. In Australia, economic reports were notably more upbeat that some of the recent disappointments, with Q2 construction work falling just -0.1% vs -3.0% expected and DEWR Skilled worker vacancies rising for the first time since October of 2007. In South Korea, Consumer Confidence rose for the fifth consecutive month to 114 - also a multi-month high level for the index.

- In regional speakers, Reserve Bank of Australia Board Member Corbett reiterated central bank's tightening bias, but also noted that sustaining consumer spending trends after economic stimulus expires is critical. In South Korea, both President Lee and Finance Minister Yoon suggested it was premature to implement or even discuss an exit strategy from stimulus measures, as economic recovery remains in its early stages. Over in China, Government Research Center's Ba forecasted Q1 GDP to exceed 10% amid accomodative monetary policy from the PBOC. Separately, a WSJ report suggested that despite low lending rates, China's small and medium sized businesses continued to struggle securing financing, with the bulk of borrowing being done by the larger state-owned enterprises.

- In equities, NEC Electronics was one of the biggest gainers on the Nikkei, rising by its daily limit of 11% after confirming press speculation that it may receive ¥200B in financial assistance for its merger with Renesas. In other Tokyo winners, Toyota rallied 2% after announcing plans to cut its global production by 10% as part of its ongoing top-to-bottom reorganization under new management into a leaner entity. In Sydney, gold producers Lihir and Sino Gold both beat top line forecasts for 1H period, with the former rising 7% after earnings and the latter remaining halted. In other Aussie names reporting results, MacArthur Coal picked up over 2% after posting FY09 profit of A$168M v A$162.6Me on sales of A$695M v A$708Me, while Westfield rallied 1.5% on profit of A$1.45B beating A$1.06B expected.

- In currencies, European majors once again drifted sideways, with risk-oriented commodity majors and Japanese Yen trading in opposite directions. EUR/USD and GBP/USD ranged around 1.43 and 1.6330 respectively, while AUD/USD and NZD/USD strengthened by about 30 pips to 0.8370 and 0.6870. JPY strengthened initially, but reversed those gains, falling to session lows late in the day across the board. USD/JPY rose to 94.20, EUR/JPY reached 134.85, and GBP/JPY retested 154. S&P's Chief Economist Wyss remarked on the prospects for US dollar in terms of its role as the global reserve currency, forecasting renewed weakness as USD falls to 70% of global reserves from 90%.

- Crude oil prices opened the Asian session lower, but have since pared their losses on the gains in the Nikkei 225 equity index. At the start of the session, oil prices declined to as low as $71.35/bbl, after API disclosed that weekly US crude inventories unexpectedly rose (API PETROLEUM INVENTORIES: CRUDE: +4.35M V -1.8ME; GASOLINE: -1.8M V -1.2ME). In NY floor trading, oil prices declined by more than 3%, after failing to hold above $75/bbl. In China, an unconfirmed report disclosed that the government may increase prices for gasoline and diesel by CNY500/ton to reflect the recent rise in crude oil prices. In Japan, July crude oil imports declined by 12.7% y/y, after dropping by 19.1% in June. Looking ahead, the later today release of the US Department of Energy's weekly inventories data is expected to give additional direction to energy markets. Last week, the Department of Energy disclosed that crude oil inventories unexpectedly declined by 8.4M barrels vs. expectations for a rise of 1.2M barrels. Spot Gold is higher by more than 0.10%, after rising by more than $2 on the COMEX. In terms of physical demand for gold, the SPDR Gold Trust ETF's holdings declined by 4.6 metric tons as of Aug 25 to a total of 1,061 metric tons.