Asian Market Update

Asian Markets Rebound Despite Multi-Year Lows for US Indices, BOJ Stands Pat at 0.30%

A hopeful early session on Wall St. following a mid-day rumor of a compromise for the auto sector bailout turned into a rout in the last hour, when a conference of Democratic Congressional leaders sent the CEOs of the Big 3 home emptyhanded. Instead of a bailout guarantee, House Speaker Pelosi asked the automakers to come back to Washington in two weeks with a plan for 'accountability and viability' as pre-requisite for Congress to 'show them the money'. The news sparked a tsunami of capitulation selling among US investors, with flight into short-end treasuries breaching 2002 lows and pushing 2-year note yields to record lows under 1%. Dow Jones shares traded volume also registered a multi-week high to levels unseen since Friday, October 10th. Recall that session saw an 800 point intraday decline before large buyers scooped in with a bargain-hunt. A comparable dynamic appears to be unfolding yet again, with US equity futures pointing to a 3% S&P rally on Friday in mid-session Asian trading hours. Heavy short-covering following capitulation suggests a pressing concern among the bears over additional coordinated action by central banks in order to stem the global equity market decline.

Citigroup has grabbed the spotlight in afterhours US session on media reports that the bank may be looking for new investors or merger opportunities, and that the board may hold formal meeting on Friday. Options listed for the firm included divesting its Smith Barney Retail Brokerage and Credit Card Unit. Additionally, earnings from PC maker Dell and retailer Gap's surprising positive outlook for same store sale were relatively favorable, helping lift investor sentiment. Company shares traded up 5.4% and 4.0% respectively.

In Japan, Nikkei225 initially tracked the decline in US markets, falling as much as 4% before mid-day break, but recovered swiftly in the aftermath of Bank of Japan decision, picking up 2.7% on the session. Policymakers left interest rates unchanged at 0.30% with a unanimous vote while maintaining a dovish tone, forecasting the economy to remain sluggish over next quarters and pledging vigilance over further downside risks. Japan's Finance Minister Nakagawa also expressed willingness to take measures in determining what government can do to curb equity weakness, stating excessive stock moves were undesirable while also calling for further cooperation with the central bank.

Australia's equities staged a similar recovery from intraday lows as S&P/ASX bounced from a 3.5% decline to a 1.6% gain by session close. Mid-session rally in commodities helped Aussie mining stocks, with Rio Tinto gaining nearly 5%. In turn, a reversal in crude oil toward the $50 level sparked a rally in Woodside Petroleum from a session opening gap down to A$27.50 to A$29 close.

Elsewhere, global short-covering sparked a rally in Korea's equities as Kospi accelerated its gains to just under 6% and Hang Seng picked up 4.5% on the session. South Korea's government was rumored to consider additional stimulus targeted at restoring domestic consumption with an added KRW2.1T ($1.4B) allocated to provide assistance to individuals with low incomes.

In currencies, short-covering in global equity markets coincided with a selloff in US dollar and Japanese Yen. EUR/USD pierced former support turned resistance at 1.2480 and subsequently found buying interest at that level on a retracement before rallying as high as 1.2550. Continued reversal of risk averse flows would target next technically pivotal former support turned resistance at 1.2590. Likewise, GBP/USD took out intra-day resistance at 1.4780 en route to 1.4880. Over the medium term, former support turned resistance at 1.5250 presents a meaningful technical hurdle. Meanwhile, USD/CHF is trading firmly lower despite the surprise 100bp cut by SNB in early US session, with Swiss franc finding consistent buying interest at 1.2285 session high. In commodity FX, Australian Dollar established firm support at 0.6070 with yet another round of RBA intervention in support of its currency, rallying as high as 0.6240. USD/CAD came within 30 pips of testing multi-month high put in late October but sold down below 1.29 on recovery in oil prices.

Singapore Central Bank responded to news of second consecutive quarterly contraction in Singapore GDP and a downgrade of growth for 2009 with a S$2.3B stimulus plan that would help companies gain access to credit. SGD weakness was defended at 1.5330 in USD/SGD by central bank as it came out with an announcement just prior to SGD bounce. USD/KRW traded above 1,500 and remains in a well defined uptrend demanding a breach of 1,470 at a minimum for confirmation of a reversal.

Crude oil is lower by more than (%), but has bounced sharply off of the sessions lows seen around $48.25 as Asian equities have rebounded and the USD has weakened. Earlier during the US session, oil broke below $50/bbl and fell by close to 9%. Spot Gold has also rebounded off of the session's worst levels and trades around ($). Traders note that gold continues to be impacted by various factors. Positive catalysts include demand for safe haven due to the financial crisis, while the negative factors include deflation concerns, the stronger USD and hedge fund liquidation.

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