Asia and the World: Yesterday and Today - Calyon Asia Research Daily

by Calyon Capital Markets Research

►Assessing the comments and questions following several days of client seminars in Hong Kong, Beijing, Shanghai, Seoul, Taipei, and Singapore for Calyon's mid year Asian road show it is clear that many investors are cautious about the outlook in the months ahead. Although there is clear relief about the turnaround in financial and economic conditions, many see this as not being durable and we concur.

►In particular, obstacles to recovery including US consumer deleveraging, business retrenchment, rising unemployment, further banking sector problems, especially in Europe, as well as the lack of adjustment in savings surplus countries from export led growth to domestic led growth have been noted as the major risks in the months ahead.

►At least for now risk appears to be back on the table as gauges including our own Risk Aversion Barometer have shown improvement. Over the last two weeks the Barometer has dropped by 2.3% and over the last 3-months it has dropped by 26.5% as most components have revealed firmer appetite for risk especially credit spreads and emerging market bonds.

► A combination of better than expected data and earnings were sufficient to push stocks higher overnight amidst thin volumes with US indices registering strong gains. On the earnings Intel forecast sales ahead of expectations helping to boost equity sentiment further, whilst stronger than forecast readings for US industrial production and Empire manufacturing provided some relief on the economic front.

►News about CIT Group Inc, the troubled US lender may act as an excuse for some profit taking today as it announced that it is unlikely to receive any Federal money. It appears that the authorities view the problems at CIT as an unlikely systemic risk despite the likely impact of failure on “thousands of retailers”. As the US Treasury noted “there is a very high threshold for exceptional assistance to individual companies”.

►There will be plenty of attention on a raft of Chinese data releases today. Already local press in China have reported that Q2 GDP rose 7.9% which would be stronger than consensus if it proves correct. Chinese inflation, retail sales and industrial production data will also be closely scrutinised to determine whether the stimulus measures are working whether the resilience of the economy continues. Firm data will no doubt support investor appetite for risk trades.

►There are also plenty of earnings on tap today including Biogen Idec, Google, and JP Morgan which will no doubt continue to be a key focus for markets. So far Q2 earnings have been beaten estimates by an average of 20% according to Bloomberg estimates though there are still many companies left to release earnings.

►Currencies continue to look range-bound and although the USD and JPY have come under some pressure as risk appetite has improved, neither have built up much momentum on the downside. Markets will eye developments about CIT, earnings releases, economic data in China and the US including the Philly Fed survey and Treasury TICS data today, to gauge direction. On balance, risk trades are gaining the upper hand.

►Asian currencies are mixed today but there is similarly not much momentum to break out of recent ranges. A generally softer USD together with likely firm data in China should provide further support for regional currencies together with evidence of strong capital inflows into Asian stocks over recent days. The earlier news that Singapore has jumped out of recession also bodes well for regional currencies over the short term.

Mitul kotecha