Asian Market Update: Equities retreat from initial gains as Japan officials remain downbeat on economic outlook; AUD sinks on mixed RBA assessment, while Sterling outperforms on strong housing data

- Asian equity markets opened the day firmer, tracking the bullish reversal in Monday's US session as traders appeared to downplay concerns over protectionism that sank global markets overnight. However, the bullish bias petered out by mid-day, with bourses in Tokyo and Sydney retreating toward unchanged levels on a set of downbeat commentary from local officials as well as troublesome corporate developments in Australia's telecom sector. With just over 2 hours to go, Nikkei225 and S&P/ASX are still up about 0.2% after gaining as much as 1% in the opening hour. Taiwan and Korean markets are leading the way with over 0.5% gains, while Shanghai Composite is around unchanged following relative regional strength over the prior session. Ahead of the Tuesday open, S&P futures point to a slightly lower open, as retail sales, PPI, and a Bernanke speech at Brooking loom for the US session.

- In notable economic data, Australia's Q2 housing starts dropped -3.7% - worse than +2.0% expected and prior month's -2.1%. This month's RBA meeting minutes did even more damage in terms of the Australian dollar, clouding prospects for the expected central bank tightening. Instead of the anticipated hawkish bias, RBA was perceived to be in a "wait-and-see" mode, noting it would keep rates on hold pending evaluation of economic data. Specifically, the RBA said some uncertainty did remain on the economic outlook as weak credit conditions weighed on recovery in the near term. Over in Japan, Economic Minister Hayashi tempered some of the recent optimism, suggesting conditions could still justify an extra budget. Meanwhile, outgoing Finance Minister Yosano spoke out against the unfolding Yen strength as weighing on exporters.
Earlier, the incoming DPJ administration officials suggested they would not look to intervene in the currency markets despite the recent Yen rally. In second tier regional data, New Zealand Q2 manufacturing sales fell -4.8% - the biggest decline in at least 15 years.

- President Obama defended his decision to impose tariffs on China tire imports, stating that they represent an enforcement of existing WTO rules but are not likely to spark the trade war. Similar comments expressed by US president in Monday's Wall St. address helped the markets downplay concerns of rising protectionism. However, Chinese Commerce ministry officials once again protested the measure, suggesting the duties are an "abuse of WTO safeguard measures" and send the wrong message to the world. Separately, China's August foreign direct investment rose 7%, the first increase in 11 months. Elsewhere in Asia, Moody's affirmed South Korean credit fundamentals, forecasting 3% GDP growth in 2010.

- In equity news, Australia's Telstra weighed particularly heavily on the broader index opening an hour into the session. Prior to the open, competition regulation authorities requested that the company enter into a structural split of its retail and wholesale units, threatening to block its broadband capacity growth. Responding to the govt, Telstra said it was disappointed with legislation, seeing many of its parts as "unnecessary". Home construction name James Hardie was upbeat on the US housing sector, calling FY2010 guidance conservative with a more pronounced improvement seen in Q2 of 2010.
Japan Airlines backtracked after rejecting equity infusion rumors, admitting to "early stage" discussion with Delta, Air France-KLM, and American Airlines equity offer. Canon also helped prop up the Nikkei, rising 4% after announcing a joint venture with HP to provide office workflow solutions.

- In currencies, AUD was the weakest performer following poor housing starts and clouded outlook for the RBA after its most recent meeting minutes. AUD/USD fell below 0.86, while EUR/AUD and GBP/AUD rose to 1.70 and 1.9320 respectively. Sterling outperformed the other majors, rising across the board after UK August RICS House Price Balance increased for the first time since Jul 2007. GBP/USD rose toward 1.6630 while EUR/GBP fell below 0.88. In other European majors, EUR ranged around 1.4620 and in commodity FX, USD/CAD was generally supported above 1.0820. Fed's Yellen said the monetary authorities did not have a specific USD target, but a significant dollar decline was detrimental in terms of fuelling inflation and creating a systemic risk to the financial system.

- Crude oil prices have moved between gains and losses on the session, and have ranged between $69.20-68.50/oz.
During the NY floor session, oil prices declined, as they tracked the weakness in the commodity currencies. Looking ahead, oil prices may receive some direction from the upcoming US API weekly inventories data and Aug US retail sales. Spot Gold is currently little changed, and has ranged between $1,002-998/oz. During the US COMEX session, gold declined by more than $5 and closed at $1,001.10/oz. In terms of physical demand for gold, the SPDR Gold Trust ETF increased its holdings on 9/14 by 1.2 metric tons to a total of 1,079 metric tons. This was the first time the ETF has added to its holdings since 9/3. In gold market commentary, gold research firm GFMS said that gold prices remain vulnerable to a short-term decline due to the oversold conditions for the US dollar. After declining by its 5% daily limit in the prior session, Shanghai Copper prices are moving higher, tracking the gains in LME copper. In other commodities, Shanghai rubber has fallen by more than 4% on the recent announcement that the US will impose tariffs on Chinese tire exports. In corporate news, Australian miner BHP disclosed that it has increased the reserve estimate for its Olympic Dam mine by 25% to 589M metric tons. The mine contains uranium, copper and gold