Geo-politics causes a stir in Asia as North Korea conducts underground nuclear test


MAJOR HEADLINES – PREVIOUS SESSION 

  • AU ASIC lifts current ban on covered short-selling of financial securities
  • JP Mar. All Industry Activity Index out at -2.4% m/m vs. -2.3% expected and revised -2.3% prior
  • SI Apr. CPI out at -1.1% m/m, -0.7% y/y vs. -0.4%, +0.6% expected and -0.4%, +1.6% resp.

THEMES TO WATCH – UPCOMING SESSION

  • GE IFO Business Climate/Current Assessment/Expectations (0800)

  • EU ECB’s Weber speaks (1000)

  • EU ECB’s Gonzalez-Paramo speaks (1800)

  • UK Spring Bank Holiday

  • US Memorial Day Holiday

Market Comment:

In its annual health check on Britain, the IMF concluded the “The aggressive actions by the authorities have been successful in containing the crisis and averting a systemic breakdown.” In addition, the IMF opined that it expects the authorities to deliver domestic and external stability and set the stage for a sustainable recovery. This, together with comments from the OECD at the weekend that a downgrade for the UK’s AAA rating was not justified and inexplicable, must be welcome news to the ears of British PM Gordon Brown who finds his government getting deeper and deeper embroiled in expenses scandals. Pressure looks set to intensify for an early general election and there is no doubt that the current Labour government would be decimated under the current electorate mood. Indeed, the Sunday Times reckons that at least half of the House of Commons’ 646 MPs will be swept away at the next general election.

Fed’s Kohn maintained the recent Fed tone on the economy in his speech on Friday. He reiterated that the US economy is now beginning to show signs that it might be stabilizing, and that the upturn, when it comes, was likely to be gradual as corporate and household America “repair” their balance sheets. As a result, he expects the Federal Funds rate to be close to zero for some time. Elsewhere, Fed’s Fisher said he was “grilled” (his words) by senior Chinese government officials on his recent trip on whether or not the US was going to monetize that actions of the legislature. On this topic, the FT carries a report on how China is stuck in a “dollar trap”, despite its musings and efforts to diversify its reserves from the dollar. The gist of the report highlights that the sheer size of China’s USD holdings will prevent it from shifting weightings in a big way.

In this morning’s events, Australia’s securities regulator ASIC lifted its eight-month ban on covered short-selling of financial securities, taking advantage of the apparent stability and recovery in the global financial system. However, the regulator warned that it would have no hesitation in re-introducing such a ban if market conditions warranted. Its monitoring of the market and market movements would likely encompass a tight review of short-selling activities by participants, in particular hedge fund and similar institutions. Reaction on the ASX was relatively muted though financials saw a knee-jerk 2%+ sell-off which was partly countered by a buoyant resource sector. Impact on the AUD was limited to a 30 tic slide on the day.

On the geo-political front, South Korea news agency Yonhap reported that North Korea had conducted a nuclear test this morning with the South Korean weather agency detecting a 4.7 magnitude tremor around the time. S Korean stocks plummeted into the red, with losses of over 4% while the KRW slid 1.6% against the dollar. The impact also filtered though across emerging Asia and the Nikkei opened with a softer tone after the break.

As the USD retreats even amid broader risk aversion themes, commodities continue to benefit as the next-best-thing safe haven in particular oil. OPEC members will be gathering in Vienna on Thursday amid a better mood and sentiment among them. Analysts are suggesting price levels are sufficiently high enough for OPEC not to consider further production cuts despite bloated inventories and still weak demand. Venezuela’s oil minister had previously commented that the cartel was aiming for oil prices around $60 p/barrel while the Saudi minister sees a pickup in demand, especially from Asia, dragging prices closer to $75 p/barrel.