Asian Market Update: Nikkei retreats from multi-month highs, while Shanghai slumps on renewed overcapacity concerns; JPY sharply firmer, replaced by USD as funding currency choice

- Asian equity markets have reversed the gains of the prior session, trading lower across the board despite the absence of clear bias from the US for the third consecutive session. After rising to 10-month highs the day before, Nikkei225 is leading the decline with 1.5% slide. Shanghai Composite traded on both sides of the opening levels but entered its midday break down by nearly 0.5%, weighed down by fresh concerns over the extent of accommodative policy conditions in China, where officials are increasingly more willing to concede overcapacity and asset bubbles. Hang Seng and Kospi are both off by 1%, while S&P/ASX and Taiex declines are just under 0.5%. Sydney is boosted by better than expected Capital Expenditure data, while the Taiex is said to supported by govt-backed funds trying to keep the index above 6,700. Ahead of the Thursday US session, September S&Ps are off session lows but still down by about 0.25%, as US markets prepare to digest the first revision of Q2 GDP.

- Australia Q2 Private Capital Expenditure and New Zealand trade balance marked the key economic events of the session. Aussie capital investment data reversed the unexpected decline in Q1, rising 3.3% v -5.0% expected, boosted by 5.3% increase in plant and machinery CAPEX. New Zealand saw its second consecutive monthly trade deficit at -NZ$163M v -NZ$150M expected, even though both imports and exports improved marginally. On a related note to the trend of negative terms of trade, New Zealand Finance Minister English will be travelling to Japan next week so as to ease debt holder concerns that New Zealand's fiscal stimulus can continue without stress on its credit rating. In other economic data, Philippines reported Q2 GDP better than the expected, with Q/Q at 2.4% topping 1.5% estimate and Y/Y at 1.5% above 0.5%e. South Korea also continued a string of improving data, with manufacturing business survey rising to its highest level since November of 2007.

- Mainland China is once again pressured by market perception of discomfort over extraordinary accommodative conditions among cabinet and central bank members. Early in the US session, Chinese Cabinet was said to cap excessive investment in industrial sectors experiencing overcapacity, planning to increase its oversight of steel, cement and coal industries while also preventing excessive construction in wind and silicon industries. Subsequently, mainland officials suggested that inflation expectations were on the rise, while former PBOC Vice Gov Wu warned that China could face long-term inflationary pressure amid expansion of M2 money supply. Separately, real estate developer China Vanke confirmed it would look to raise up to CNY11.2B in a share sale - an offer larger than previously rumored CNY10B sale.

- In other equities, Oz Minerals reported wider than expected loss of loss A$586M v loss A$450.5Me on lower than expected sales of A$855M v A$995Me. Toll Holding reported FY09 earnings in line at A$303M but missed on the top line, posting sales of A$5.6B v A$6.68Be, while Woolworths met estimates on top and bottom line, rising 0.5%. Airlines Virgin Blue and Air New Zealand also reported FY09 results, with the former posting a narrower than expected loss and forecasting break even in FY2010.

- In currencies, the Yen firmed across the board on risk aversion, gaining particularly strongly against the falling GBP and NZD. USD/JPY approached multi-week lows around 93.50, GBP/JPY hit 6-week lows below 152.20, while NZD/JPY fell about 70 pips to 63.50. WSJ reported that Japanese Yen has recently been eclipsed by the low-yielding dollar as a preferred funding currency of choice in carry trade demand. European majors were largely sideways in Asia for third consecutive session, with EUR/USD and GBP/USD ranging around 1.4250 and 1.6220 respectively.

- Crude oil prices are lower and trading below $71.50/bbl, tracking the weakness in Asian equities. In NY trading, oil prices declined and at one point dipped below $71/bbl as the Department of Energy's weekly inventories report showed that crude oil stockpiles unexpectedly rose (DOE CRUDE: +128K V -1.8ME; GASOLINE: -1.7M V -1.2ME;). In terms of US oil demand, AAA said that it expected Labor Day holiday travel to decline by 13% y/y. As OPEC's Sept 9th meeting nears, yesterday Iran's Oil Minister said that the cartel may discuss the expected Q1 output surplus at the meeting. Additionally, Nigeria's Oil Minister said the he is satisfied with oil prices of $70-80/bbl and does not plan to push for any changes in production at the Sept meeting. Shanghai Copper prices are lower as of the time of writing. Copper is being weighted down by the early decline in Chinese equities and by a Chinese Cabinet report which noted that the government was planning to curb excessive investment in certain sectors facing overcapacity. Looking ahead, commodity traders may focus on the upcoming US Q2 preliminary GDP data and weekly initial jobless claims.