Asian Market Update

Bernanke optimistic about the U.S. economy, bond yields spike higher

The surprising jump in the unemployment rate last month hasn't materially affected the economic outlook, Fed chairman Bernanke told a conference in Chatham, Mass., sponsored by the Federal Reserve Bank of Boston. Bernanke said the likelihood of a serious recession has fallen. 'Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,' he said. The Fed chairman said energy prices added to upside risks, but added that pass-through of raw materials costs to most prices and labor costs has been limited.

Market reaction to Bernanke's comments: Bernanke's relatively optimistic assessment of the U.S. economy pushed bond yields higher. U.S. yields spiked higher in Asia, with the market scrambling to cover shorts after the dramatic over reaction to Friday's jobs data. Aussie 3yr bond futures dropped 0.25pts in the moments after his comments, the biggest daily fall in 5 years. The JGB 5yr yield hit a five month high above 1.395%, while U.S. 10yr yields moved above 4.05%. AUD/USD dropped below an option barrier at 0.9480, EUR/USD triggered stops below 1.5600, and USD/JPY broke above a key resistance level at 106.60 (the 38.2% retracement of the major 124.15/95.75 down move). S&P500 futures drifted lower for most of the session, souring sentiment on other Asian stock markets.

Japanese machine orders rebound in April: (JP APRIL MACHINE ORDERS MOM: 5.5% V 3.0% expected, -8.3% prior; YOY: 0.5% V -1.7% expected, -6.2% prior) Japan's core machinery orders rebounded after two months of declines, but the data failed to change the consensus that the Bank of Japan will leave rates steady for the next few months. 'Capital expenditures are somewhat weakening as rises in crude oil and commodity prices are hurting corporate revenues,' said Hiroko Ota, Japan's Economics Minister.

Australian business sentiment improves in May: (AU MAY NAB BUSINESS CONFIDENCE: -4 V -8 prior; CONDITIONS: 7 V 7 prior) 'The big picture taken from the survey is that, following recent sharp falls, both confidence and conditions stabilized somewhat in May,' said Alan Oster, NAB's group chief economist. 'Business apparently is now starting to reassess demand for future new hires as it reassesses the business outlook,' he said. The other significant new development in the survey was the sharp fall in capacity utilization reported in May, Oster said. The reading on capacity utilization fell 2 percentage points to 82.3%.

Australia home loans decline for the third straight month: (AU APRIL HOME LOANS: -3.0% V -2.0% expected, -6.1% prior; INVESTMENT LENDING: 1.4% V -7.2% prior)

Australian employers cautious about hiring new staff: (AU May ANZ Job Advertisements MoM: -1.7% v 3.1% prior) 'While the slowing in job advertisements growth is consistent with some of the weaker partial activity data we have seen across the economy in recent months, we think this reflects caution on the part of employers about hiring new staff,' said ANZ co-head of economics Sally Auld. 'Tighter credit conditions and uncertainty about the global economic outlook may also be negatively impacting business hiring decisions.'

According to reports, China's May CPI rose 7.7% on a y/y basis, lower than market expectations of 8.0%, and also lower than the prior reading of 8.5%.

Equities: At 0:19 EDT Japan's Nikkei is -1.15%, the S&P/ASX200 is -2.20%, South Korea's KOSPI is -1.77% and the Shanghai Composite index is -5.67%. The S&P500 futures contract lost -0.51% since the U.S. close, last trading at 1,356.50. The Nikkei opened higher, but hawkish commentary from the Fed's Bernanke caused sharp declines as the session progressed. Commodity-related stocks and financials led much of the downside in Tokyo, while catch-up selling pushed the S&P/ASX200 index below 5,500. Shares of Samsung Electronics and Hyundai Motors traded lower in Seoul, pushing the KOSPI below 1,780. South Korean investors also had to deal with news that the country's cabinet offered to resign due to the dispute over U.S. beef imports. The Shanghai Composite index is currently down by more than 5.5%, with investors dumping shares after the PBoC raised the reserve requirement for banks.

Commodities: Nymex crude oil prices gained +0.48% between 18:00 EDT and 0:15 EDT, last trading at $134.99/bbl. It was interesting to see crude prices ignoring the USD buying on the back of Bernanke's comments. Merrill's Vice Chairman said that he now sees $80-$150/bbl as the new trading range for oil prices, up from the prior $50-$80/bbl forecasted range. Spot gold prices are lower by -0.57% , last trading around $893.00/oz.

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