Asian Market Update: China PMI Manufacturing Edges Higher, Japan Tankan Misses Estimates but Shows Relative Improvement; Aussie Retail Sales, Housing Data See Mixed Picture
Asian equity markets are far more subdued than the firm start in the first two sessions, tracking the broad-based selloff emerging in the US session. With just over 2 hours to go in the session, S&P/ASX is leading the decline among the major regional bourses with a 2.1% slide spurred by weakness in energy and commodity space, while Nikkei225 has battled back into marginal positive territory after a negative start on the back of Japanese Yen selloff. Tokyo's tech sector is leading the index rally as energy and materials names are lagging among the sector losers. Elsewhere, Korea's Kospi is firmer by 0.8%, and Taiwan's Taiex is at the helm of the regional rally with 1.4% advance following press speculation of China sending its delegate to the island to assess investment opportunities. Ahead of the US session, front month S&Ps are up a marginal 0.2% and benchmark yields are holding above the 3.50% mark.

- Economic calendar saw a busy session, with a set of indicators from China, Japan, and Australia registering a mixed to positive set of numbers. Key session event - China June Manufacturing PMI - inched higher after falling slightly in the month of May. Official June figure came in at 53.2 v 53.1 prior, a 4th consecutive reading above the expansionary threshold 50 mark, while the privately conducted CLSA number saw an 11-month high at 51.8 v 51.2 prior. The improvement relieved market anxiety over the trend of manufacturing data in China after prior May data saw its first decline in 6 months. Manufacturing sector was also under review in Japan. Q2 Tankan Large Manufacturing Survey fell short of estimated -43 at -48 but improved for the first time in 10 quarters, and outlook figure painted a rosier prospect picture at -30 v -34 expected and -58 prior. The non-manufacturing component fell short of expected -27 at -29, but outlook at -21 was also above the expected -23 and prior -30. Australia released its May retail sales and building approvals data for the month of May concurrently, with the improvement in one overshadowed by the disappointment in the other. Retail sales rose 1%, better than expected 0.5% and prior 0.3%, but building approvals saw its worst level since November of 2008 at -12.5% - well below +3.0% expected and +4.1% prior. The report marks a second consecutive disappointment from the Aussie housing sector after HIA new home sales fell at its worst pace in the last 10 months during the prior session.

- Among notable speakers, comments from Fed's Yellen resonated somewhat dovishly in terms of policy prospects, noting that the funds rate could be near zero for a couple of years and that the end of recession did not necessarily mark the appropriate time "to take away the punchbowl". Yellen suggested that tightening policy before the end of 2009 would be premature. Regarding the rising market concerns over inflation, Yellen said there was little threat of an inflationary surge, while risks over deflation still exist. Moreover, Yellen was downbeat about the labor market, pinning a return to 6% within the next few years as an optimal scenario. In Asian region's speakers, Japan's Finance Minister Yosano appeared upbeat in the published FT interview, forecasting auto, steel, and electrical machinery industries to lead the bottomed domestic economy higher. On Japan's political front, PM Aso was rumored to target August 8th as the date for a general election and further considered dissolving the lower house of Parliament following Tokyo metropolitan election on Jul 12th.

- In equity news, Toyota was in the spotlight after Fitch followed S&P's early May downgrade by lowering its long-term foreign and local currency issuer default ratings and sr unsecured debt ratings by 2 notches to A+ from AA. The action was said to reflect weak medium-term fundaments in auto industry that would make it difficult for the company to return to comparable profitability seen in late 2008. Mitsubishi Heavy said the company was preparing for talks on buying a stake in Areva from the French govt following last week's speculation that it would be one of the potential suitors for a 15% stake in the company. In financials, Aozora and Shinsei banks are preparing for a 2:30amET press conference regarding their merger as Japanese press speculated that they would also seek public funds as part of the transaction. In tech, Sharp said it was continuing discussions with Sony regarding an LCD investment after being unable to reach an agreement by the targeted June 30th deadline. Several Japanese companies were also rumored to consider an equity raise. Mizuho Financial was expected to announce plans to raise ¥600B in new equity later on Wednesday, while All Nippon Air and Orix were speculated to offer ¥150B and ¥100B respectively, as both companies responded they were not the source of the rumor. In Australia, weakness in the commodity sector was underscored by tensions leading up to the iron ore yearly contract price expiration at the end of June. South China Morning Post said China's steel companies and the iron-ore producers failed to reach an agreement by deadline, and Caijing press noted that they may accept less than a 40% price reduction in iron ore prices.

- In currencies, the greenback consolidated its gains against European and Asian commodity majors, while hitting multi-day highs against JPY and CAD. USD/JPY rallied to 97.00 handle - best levels since June 19th - and USD/CAD briefly tested 1.1640 for the first time since May 20th. EUR/USD and GBP/USD oscillated in respective ranges of 1.40-1.4050 and 1.6440-1.6490, and AUD/USD tested the intraday low around 0.8040.

- Crude oil is higher by more than 0.50% and has moved back above $70/bbl. During the US session, oil prices declined by more than 2% and closed below $70/bbl. In Asian trading, crude is being supported by the gains in equities and the API petroleum inventories data, which was released following the US equity close. API disclosed that weekly crude inventories declined more than expected, while gasoline inventories rose less than expected (API PETROLEUM INVENTORIES: CRUDE: -6.82M V -1.5ME GASOLINE: +210K V +2ME). Additionally, the continued expansion of China's PMI manufacturing data is seen as supportive to energy markets. Looking ahead ,the US Department of Energy's weekly oil inventories figures will be released later on today. Spot Gold is higher by more than 0.10% and at the time of writing is trading just below $930/oz. During the US session, gold prices declined more than $13, tracking the weakness in EUR/USD and oil prices. In terms of physical demand for gold, the SPDR Gold Trust ETF noted that its holdings declined by 5.2 metric tons to 1,120 metric tons as of June 30.

European Market Internals update at 10:30am ET
- FTSE100 volume 783.4M shares, about 3% higher than its 30 trading day moving average
- DAX30 volume 78.9M shares, about 13% higher than its 30 trading day moving average
- CAC40 volume 81.3M shares, about 9% lower than its 30 trading day moving average