Asian Market Update: G20 replaces G8 as permanent framework for cooperation, Communique calls for continued policy response until sustainable recovery is in place; Dollar lifted by hawkish WSJ op-ed from Fed's Warsh


ECONOMIC DATA 

- (KS) South Korea Sep Consumer Confidence: 114.0 V 114.0 PRIOR; highest level since July 2008

- (NZ) New Zealand Aug Trade Balance (NZ$): -725M V -329ME; Largest deficit since Oct 2008

- (JP) Japan Aug Corporate Service Prices Y/Y: -3.5% v -3.5%e

- (PH) Philippines Jul Trade Balance: -$715M v -$701M prior

- (CH) China Sep MNI Business Sentiment Survey: 60.5 v 56.8 prior

- (SI) Singapore Aug Industrial Production M/M: -5.6% v -6.4%e; Y/Y: 12.3% v 5.0%e


SPEAKERS/FIXED INCOME/FX 

- Asian equity markets are selling off going into the weekend, as investor caution in the US spurred by a drop in existing home sales following 4 months of growth is spilling into overseas markets. With just over an hour to go in Tokyo, Nikke225 is leading the decline with a 2.6% slide after strong performance in the prior session. Kospi and Shanghai are both down 1.4%, while S&P/ASX is the only major regional index to have pared all of the early selloff to trade around unchanged levels. Financials and energy sectors are weighing on Asian bourses across the board, with concerns over global liquidity drain and weakness in crude prices driving the sellers.

- G20 summit convening in Pittsburgh is expected to announce an expanded framework for economic policy cooperation replacing G8 in that role permanently. The shift is likely to include a "peer review" of the larger economies by smaller members, potentially exposing US and China economic policies to greater scrutiny. Also addressed in the communique draft, G20 is expected to cover several points on financial regulation, including a recommendation on banks' capital ratios and a possible curb on executive compensation. In terms of the stimulus exit, G20 draft suggests that members will agree on maintaining a strong policy response until clearer signs of recovery emerge, followed by a coordinated action.

- A hawkish op-ed piece by Fed Governor Warsh prompted a spike in the US Dollar in mid-session, suggesting that policy normalization is likely before the need becomes obvious. Warsh also noted improvements in market conditions, with rising financial asset prices signaling growth and inflation ahead of economic indicators. Also supporting the greenback earlier in the session, Treasury's Geithner expressed optimism that USD would be the primary world reserve for a very long time, while China Planning Agency's Ma and PBOC both noted the dollar stability is critical for global recovery hopes. In other G20 developments, Australia's PM Rudd and China's President Hu continued to mend fences, agreeing on deeper economic cooperation. Over in Japan, Deputy PM Kan cited improving conditions in the export sector, also announcing intentions to begin work on next year's fiscal budget within days. Policy minutes from Japan's central bank August meeting saw an accommodative stance amid ongoing credit challenges for small business and uncertainty regarding overseas economy.


EQUITIES 

- In Tokyo equities, Nomura traded limit down after the company announced a ¥257B capital raise over the prior session. Japan Airlines continued to trade lower, falling over 5% after announcing it would draft a restructuring plan by the end of November. Japan Chief Cabinet Secretary Hirano said the company would not be allowed to fail. In the auto-sector, Toyota said it would expand its focus on China with plans to sell lower-priced vehicles on the mainland. On a related note, Ford said it would open a third assembly plant in China to be managed jointly with Mazda. Outside the Nikkei, ANZ Bank acquired Australian and New Zealand insurance business from ING for €1.1B in cash. Separately, ANZ said it was not interested in Suncorp. In the commodities space, Rio Tinto saw global copper reserves declining, forecasting a cut in CAPEX to address the market downturn.

- Over in Korea, Woori Finance fell sharply by about 5% after press report that the government would sell some of its stake in the company. However, that weakness in financials was countered by a 14-month high in consumer confidence. A WSJ opinion reflected on improving conditions in Korea amid high consumer sentiment, strong dept store sales, and heavy mortgage debt environment being reminiscent of "US in 2006", but suggesting that risk-oriented trends may persist because of a well-funded pension system and overstated debt levels.


CURRENCIES 

- Sterling remained the weakest link among the major FX pairs in the wake of the dovish BOE assessment, extending its selloff following the hawkish WSJ op-ed by Fed's Warsh. GBP/USD fell to 3-month lows below 1.60, while EUR/GBP rose toward 5-month high around 0.92. EUR/USD traded down to 1.4620 before retracing those losses following the G20 communique pledging accommodative stance. In commodity FX, USD/CAD consolidated its gains, retreating below 1.09.
NZD had also reversed some of its recent strength after New Zealand Aug Trade figures saw its largest deficit in 10 months on 2-yr low in the exports component. Japanese Yen was firmer across the board, with Japan's Finance Minister reaffirming opposition to FX market interventions. The yen also tracked the greenback rally in the wake of the Warsh commentary reversing risk-related carry flows.


COMMODITIES

- Crude oil prices are higher by more than 0.50%, after declining by more than 4% during the NY session. In NY trading, oil prices were weighed down by the stronger dollar and weaker than expected housing data. In China related energy news, an official was quoted as saying that the government has started building the second phase of its emergency oil reserves, which will be followed by the building of the 3rd phase of oil reserves. According to the Chinese official, his country's oil reserves are still low when compared to international standards On a weekly basis, oil prices are on track for the worst loss since July. Spot Gold prices are higher by more than 0.10% and as of the time of writing trading below $1,000/oz. During the NY session, gold prices declined by more than $15.00 on the COMEX and closed at $998.90/oz. In terms of physical demand for gold, the SPDR Gold Trust ETF disclosed that its holdings declined by 7.6 metric tons to 1,094 metric tons as of Sept 24. This was the ETF's largest drop in its gold holdings since July 29. In other commodities, Shanghai Copper prices are declining, tracking the early weakness in Chinese equities. Later today, the Shanghai Futures Exchange will release its weekly copper inventories data. During the prior week, copper inventories rose by 7% to 104.4K metric tons.