Asian Market Update

Disappointment Over Marginal China Rate Cut Pressures Asian Equities, Euro Rally Cut Short by US Session High

A 27bp PBOC rate cut to 5.31% in early US hours - the fifth cut since September - did not lack the element of surprise. What it did lack however, as evidenced by the broad-based selloff in Asia, was the comparable magnitude of accelerated easing predicated by the previous 108bp China central bank cut as well as the relatively aggressive stance taken by monetary authorities in US, UK, Japan, and Australia since then. Disappointment over PBOC action was further exacerbated by thin pre-holiday liquidity in the markets. In late session trading, shares in Sydney were down over 1%, Korea's Kospi dropped by 2.7%, Hang Seng shed 2.8%, and Shanghai markets were down by over 3%. Tokyo Nikkei remained closed in observance of the Emperor's birthday - a nationwide bank holiday.

In a notable US after-hours Big 3 auto rescue development, the ratings on debt issued by GM and Ford were cut further down to junk status by S&P and Moody's. (S&P cut GM debt one level down to C - 11 grades below investment quality - while Moody's cut $26B of Ford debt to Caa3.) The ratings agencies expressed a lack of confidence over the viability of the US industry given the declining consumer demand amid the global recession, even as the government had finally extended a $17.4B emergency aid designed to get the Detroit carmakers through the first quarter. Furthermore, S&P remarked on continued bankruptcy risk in light of the reluctance by the incoming administration to commit to an open-ended support.

Among the more active shares traded across the Asian bourses, HFA Holdings - an Aussie hedge fund with over $5B in assets collapsed over 50% in Sydney after halting redemptions. Shares of miners BHP and Rio Tinto were also down by 3.9% and 5.4% following a slash in earnings estimates from UBS as the bank lowered its projected demand estimates for coal. Fortescue metals regained its footing after announcing a share issue to balance out the frozen assets sought in a lawsuit by Greek billionaire John Angelicoussis. In Korea, shares of automakers Hyundai and Kia fell 9.5% and 14% respectively on combined impact of lowered US auto credit ratings and slashed earnings outlook at Toyota Motors. Shares of Hynix also slumped 6% following a Moody's debt rating cut to B1 from Ba3 in light of a more uncertain demand outlook. DRAM manufacturers have traded higher for much of last week on rising chip costs.

In currencies, USD majors were predominantly subdued by thin pre-holiday market conditions, remaining range-bound nearly across the board. EUR/USD was the lone exception to listless range, rallying by nearly one big figure above 1.40 before succumbing to profit taking at intra-day resistance high of 1.4020. GBP/USD oscillated between 1.48 and 1.4850, while USD/CHF bounced between 1.09 and 1.0950. Japanese Yen was also contained by 90.50 against the greenback and 134 resistance against GBP, losing out on greater scale to the rallying Euro. In commodity FX, AUD/USD failed to trade outside the 0.6815-50 range and NZD/USD pared its knee-jerk losses following a third consecutive contracting quarter seen in New Zealand's Q3 GDP data.

At the time of writing, crude oil prices are lower, tracking the weakness being seen in Asian equities. During the NY session, oil prices closed down by close to 6% as US equities closed lower. In South Korea, the government announced that it plans to increase its tariff on imports of crude oil to 3% from 1%. The move by South Korea, the world's fifth largest oil importer, comes as Korea National Oil announced that the country's oil demand dropped by 12% y/y in Nov. In China, the government confirmed that its Nov crude oil imports declined by 1.86%, as the country's growth slows. Spot Gold is declining after failing to move above $850/oz earlier during the session. Of note, gold prices are lower despite the gains being seen in the Euro against the dollar.

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