Asian Market Update: Japan passes 2nd extra budget; Fresh rating agency action concerns weigh on the euro

***Economic Data***

– (AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH TARGET RATE UNCHANGED AT 4.75%; AS EXPECTED
– (NZ) NEW ZEALAND Q2 NZIER BUSINESS OPINION SURVEY: +27 V -27 PRIOR (highest level since Q4 of 2009)
– (AU) AUSTRALIA MAY TRADE BALANCE (A$): 2.33B V 1.90BE (7-month high)
– (AU) AUSTRALIA JUN AIG PERFORMANCE OF SERVICE INDEX: 48.5 V 49.9 PRIOR (second consecutive contraction)
– (CH) CHINA JUN CHINA HSBC SERVICES PMI: 54.1 V 54.3 PRIOR
– (JP) JAPAN MAY LABOR CASH EARNINGS Y/Y: +1.1% V -0.5%E (10-month high)
– (PH) PHILIPPINES JUN CONSUMER PRICE INDEX M/M: 0.4% V 0.3%E; Y/Y: 4.6% V 4.7%E; CORE CPI Y/Y: 4.0% V 3.7% PRIOR
– (MA) MALAYSIA MAY TRADE BALANCE (MYR): 8.5B V 10.5BE
– (RU) RUSSIA JUN SERVICES PMI: 55.1 V 57.6 PRIOR

***Markets Snapshot (as of 05:00GMT)***
– Nikkei225 +0.3%
– S&P/ASX -0.2%
– Kospi +0.6%
– Taiex unchanged
– Shanghai Composite -0.1%
– Hang Seng unchanged
– S&P Futures -0.2% at 1,332
– Spot Gold unchanged at $1,495/oz
– Aug Crude -0.2% at $94.74

***Overview/Top Headlines***
– Markets were thinly traded and mixed with fresh concerns of tightening action from China weighed on Australia and China markets. Key US payroll numbers later this week should hold markets in limbo for most of the week as the markets look to see if the US is still in a soft path of recovery. Markets were little impressed by the RBA keeping rates on hold. Japan passed their second extra budget of ¥2T (lower than the first extra budget of ¥4T); No bond issuance as part of 2nd extra budget and the Govt is expected to start drafting 3rd extra budget soon expected to be larger than the first two. EUR/USD fell over 70 pips early in the session on fresh worries the rating agencies would take action on Greece. NZD/USD hit new post-flotation record high above $0.8320. Sept Wheat and Corn contracts rose over 2.0% above $6.20.

– A confused outlook on the future of China’s policy continues. One report from China noted that the PBoC’s most recent comments pledging to maintain “prudent” monetary policy in attempt to control inflation suggests it may raise rates as early as this weekend while a separate reported said that the PBoC may appropriately ease the pace of monetary policy adjustment and while another report that that H2 policy may be focused on maintaining growth. Services PMI had a sequential fall in June to 55.1 from 57.6 prior. Moody’s: Scale of problem loans to Chinese local governments is greater than anticipated; May lower outlook to Negative without a plan to deal with govt debt Moody’s also views the credit outlook for the Chinese banking system as potentially turning to negative. Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody’s has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report.

– Australia trade remains strong with the May trade balance surpassing expectations to reach A$2.33B a 7-month high, exports rose 3% and gold exports reached A$1.57B v A$1.02B prior, exports to Australia’s largest trading partner, China, increased to A$5.62B from A$5.02B prior. AUD/USD fell to session lows below $1.0680 after the RBA kep the target rate on hold, as expected. Added to the statement that growth in 2011 is unlikely to be as strong as expected; Medium term is likely to be as expected or higher. Reiterates mildly restrictive policy stance remains appropriate. Added “Inflation has been in the bottom half of target in underlying terms”; Reiterates “gradual increase expected over time.” Reiterates Employment growth has moderated over the recent months and growth is expected to remain slower. Reiterates terms of trade remain at very high levels.

– The credit crunch in Greece continues to unfold with Greece receiving the next tranche in funds over the weekend. All eyes are on the major rating agencies and their actions. ECB will continue accepting Greek debt as collateral unless all 3 top credit rating agencies say Greece is in default. The ECB will use the method of “best available” rating from the rating agency for Greece debt. Reminder, earlier today: Moody’s: Not involved in Greece debt rollover talks and will assess the plan once a final decision has been made.
– S&P: Debt rollover may place Greece in “selective default”. ECB’s Nowotny said that the second Greek bailout to have a longer term and more defined criteria; Having difficult discussions with rating agencies. Banks trying to stabilize Greece – the problem is with the rating agencies who are being more strict with Greece than they have been in South America. Greece Opposition Leader Samaras: Greece will continue to miss deficit goals; Tax cuts would jumpstart growth and increase sentiment. Calling the austerity plan is a “failure” and saying that the EU/IMF will need to change policies. Greece Fin Min Venizelos: Must raise €1.7B in privatization revenue by Sept; Will return to bond market in mid-2014; Revenue expected to grow 10% in 2011.

***Speakers/Geopolitical/In the press***
– (CH) Moody’s: Scale of problem loans to Chinese local governments is greater than anticipated; May lower outlook to Negative without a plan to deal with govt debt
– (KS) South Korea Trade Min Kim Jong-hoon: Looking to increase EU market share to 3% within 3-years after expansion of bilateral trade agreement last week – Korean press
– (HK) Mortgage applications in Hong Kong are down 20.2% in H1 2011 v H2 2010 – HK Standard
– (CH) World Trade Organization (WTO) will condemn China for limiting its exports of major raw materials – financial press
– (CH) PBoC Survey of urban households: Most Beijing households feel that prices are too high – Chinese Press
– (US) NY Gov Andrew Cuomo may join Pres Obama on presidential elections ticket in 2012 – NY Post citing NY GOP party boss William Powers

***Equities***
– FMG.AU: Will issue debt sometime this year; Expansion plans are coming along well and expects to meet targets
– LSE.UK: Qatar Investment Authority will block any offer for less than £15/shr – Daily Mail
– TWE.AU: Bright Food Group: Not in talks to acquire Treasury Wine Estates – Australian Financial Review
– Tepco, 9501.JP: Will pay an additional ¥100-300K per a person impact by evacuations near Fukushima; Total extra compensation to total ¥48B
– MMX.AU: Mitsubishi has said it will not pay more than A$500M for a 50% stake in the Jack Hills iron ore project – Australian Financial Review
– Tokyo Stock Exchange: No decision has been made on acquiring Osaka Stock Exchange

***FX/Fixed Income/Commodities***
– JGB: Japan MoF sold ¥2.0T in 1.2% 10-yr bonds (1.2% prior), bid to cover 3.24X v 2.70X prior
– (CH) PBoC sells 1-yr bills at 3.4982% v 3.4982% (unchanged for the 2nd consecutive auction)
– JGB: Japan’s MoF offers ¥2.2T in 1.2% (1.2% prior) 10-year bonds
– (CH) PBoC sets yuan mid point at 6.4650 v 6.4629 prior close (new yuan high since July 2005 revaluation)
– (AU) Australia Newcastle: Thermal coal prices have increased 0.7% w/w (second consecutive increase) to A$120.40/ metric ton
– (RU) Russian Energy Ministry: June natural gas production fell to 1.689bcm from 1.86bcm in May (-9% m/m); Oil production fell to 10.195M bpd from 10.26M bpd (-0.6% m/m)

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July 5th, 2011 in Forex News

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