Was Asia the victim of an April fool's joke?

A volatile session with risk off/risk on switching constantly on reported stance of US automakers, subsequently denied. Japan Tankan again gloomy reading

MAJOR HEADLINES – PREVIOUS SESSION

• US Jan. S&P/CaseShiller HPI out at -19.97% vs. -18.6% expected and revised -18.6% prior

• US Mar. Chicago PMI out at 31.4 vs. 34.3 expected and 34.2 prior

• US Mar. Consumer Confidence out at 26.0 vs. 28.0 expected and revised 25.3 prior

• US ABC Consumer Confidence out at -49 as expected from -49 prior

• JP Q1 Tankan Lge Manuf Index out at -58 vs. -55 expected and -24 prior

• JP Q1 Tankan Lge non-Manuf Index out at -31 vs. -25 expected and -9 prior

• JP Q1 Tankan Lge Manuf outlook out at -51 vs. -52 expected and -36 prior

• JP Q1 Tankan Lge non-Manuf outlook out at -30 vs. -25 expected and -14 prior

• JP Q1 Tankan Lge all-indust Capex out at -6.6% vs. -12.0% expected and -0.2% prior

• AU Feb. Retail Sales out at -2.0% m/m vs. -0.5% expected and revised +0.5% prior

• AU Feb. Building Approvals out at +7.8% m/m, -25.5% y/y vs. revised -4.0% m/m, -33.9% y/y prior

THEMES TO WATCH – UPCOMING SESSION

• AU RBA Commodity Index (0530)

• GE Retail Sales (0600)

• Sweden PMI (0630)

• Swiss PMI (0730)

• EU Euro-zone PMI manufacturing (0800)

• UK PMI Manufacturing (0830)

• EU Euro-zone Unemployment Rate (0900)

• US ADP Private Hiring (1215)

• US ISM manufacturing (1400)

• US Pending Home sales (1400)

• US Construction Spending (1400)

Market Comment:

Having grabbed the market’s attention on the last trading day of Q1, Japan once again was in focus as Q2 got under way. The Q1 Tankan report on business conditions came out broadly worse than expected, with sentiment among large manufacturers recorded the sharpest fall ever in the survey’s history and at -58 hitting its lowest level since May 1974. Large non-manufacturers were also gloomy, though not to the same extent, registering a -31 reading which was still the lowest since March 1999. In terms of the outlook, results for large manufacturers were marginally better than expected, though still in a depressed state. CAPEX plans for the next business year were also scaled back though not quite to the extent that was feared in the forecasts. Generally the view is that the survey is negative and likely leads to a more protracted recession. The JPY reacted as expected, initially, with USDJPY rallying to a 99.47 high from 98.80 levels. The Nikkei edged back to flat from early gains of approx. 0.5%.

However…..

Bloomberg headlines soon put a spanner in the works when it was reported that US Pres Obama had determined that a pre-packaged bankruptcy was the best option for GM to restructure and regain competitiveness while he was prepared to let Chrysler go bankrupt and be sold off piecemeal. This prompted a scurry out of JPY crosses and a 1-big-fig fall in USDJPY within a minute. The subsequent denial came from a senior Administration officer, via Reuters, who said that the report was “not accurate” and that nothing had changed on the automakers situation and circumstance since Monday. The risk aversion mentality was quickly taken off the table and we reverted back higher, though struggled to reach the same heady levels seen earlier.

Weak data was also apparent from Australia, where headline retail sales numbers were much weaker than forecast. At -2.0% m/m, the decline in February was the first in 3 months was far in excess of the -0.5% forecast. The fall suggests that the stimulus from the government handouts seen in December and January was waning and could be a forewarning to other governments about the fickle and short-term nature of such injections. On a more positive note, building approvals bounced back by a respectable 7.8% from the previous month, its first positive number in 8 attempts. On a sector-by-sector breakdown, private sector houses were only marginally higher at +0.1% m/m while the notoriously volatile private sector “others” were a commanding 34.1% higher on the month.

Whilst on things Antipodean, RBNZ Governor Alan Bollard issued a statement via email that New Zealand long-term interest rates have risen too much and are inconsistent with the monetary policy outlook. He said economic recovery is expected to be very gradual and in these circumstances, he believes the rise in longer-term interest rates is unwarranted and inconsistent with the monetary policy outlook. NZD took a nosedive on the back of these comments which was exacerbated by the Obama story.

A lead article in the UK’s Telegraph highlights that ratings agency S&P has warned that it may prove "extremely difficult" for European companies to roll over €565bn of rated corporate debt coming due by the end of the next year, raising the risk of a default crisis on low-grade bonds. The agency said the deluge of bond issuance by governments struggling to cover deficits may "overwhelm investors" at some point this year and lead to a sharp spike in long-term bond rates. It fears that this would cause a cascade effect across the spectrum of corporate debt and shut A- and BBB-rated companies out of credit markets.