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Conclusion: Amid mixed-to-sour economic data, Asian currencies, equity markets, long-end bond yields, and 10Y-2Y spreads exhibited broad-based signs of bullishness on a week-over-week basis – likely due in part to the perceived “resolution” in Greece. Asian credit had a strong week as well, from both a spreads and swaps perspective.

Below we introduce our first installment of a weekly recap of prices, economic data, relevant news, and internal analysis across the Asian geography. We’ll generally keep our prose to a minimum in this piece, only chiming in where our analysis adds value to the data (please email us if you’d like more color on a particular topic). Further, we’ll parse the data and analysis into three distinct sections for ease of interpretation: 1) Key Economic & Policy Data; 2) Price Action; and 3) Correlations. So without further adieu…

KEY ECONOMIC & POLICY DATA

 

China:

  • China’s National Audit Office published a report finding total liabilities of China’s Local Governments to be 10.7 trillion yuan ($1.7T) and flagged an overreliance on land values as collateral for credit as a major repayment risk over the long term (70% of loans mature within the next five years).
  • Chinese Premier Wen Jiabao affirmed recent government forecasts that CPI will slow in 2H.
  • PBOC liquidity injections helped China’s recent money market tightness ease throughout the course of the week, with the seven-day repo rate falling -266bps week-over-week.
  • Effective today, China will cut its import tax on refined oil products to ensure adequate supplies for domestic demand.
  • China raised its monthly personal income tax threshold +75% to 3,500 yuan ($542) in an effort to spur domestic consumption by lowering the consumer’s tax burden.
  • Manufacturing PMI fell to 50.9 in June vs. a prior reading of 52. The New Orders sub-index also declined, falling to 50.8 vs. a prior reading of 52.1. On the positive side, the Input Prices sub-index fell to an 11-month low of 56.7.
  • An unofficial index provided by property developer SouFun Holdings Ltd. showed that growth in Chinese Real Estate Prices slowed marginally to +0.4% MoM in June vs. a prior reading of +0.5%, marking the 10th consecutive month of positive growth.

Hong Kong

  • Home prices (up +70% since the start of 2009) and retail rents (up +27% over the same duration) are putting upward pressure on CPI, which, in turn, is causing increased civil unrest within the territory.
  • Burgeoning consumer prices (latest: +5.2% YoY) and a growing reputation for pandering towards the elite caused Chief Executive Donald Tsang’s approval rating to drop to 46.5% - the lowest reading since he took office in 2005.
  • The Hong Kong economy continues to overheat with Money Supply (M3) growth accelerating in May to +11.4% YoY vs. a prior reading of +6%.

Taiwan

  • The Central Bank of China (Taiwan) raised its discount rate +12.5bps to 1.875%.
  • HSBC Manufacturing PMI plummeted in June to 49.9 vs. a prior reading of 54.9.

Japan

  • Small Business Confidence edged up in June: 43.1 vs. a prior reading of 37.8.
  • Prime Minister Naoto Kan pledged to remain in office until the following three controversial bills are passed by the Diet: 1) a second (smaller) stimulus bill; 2) deficit financing legislation; and 3) a renewable energy bill.
  • On MoM basis, Industrial Production growth accelerated to a ~68-year high of +5.7% as factories came back online in certain areas. On a YoY basis, however, growth contracted at -5.9% rate, suggesting that the headline “growth” number is rather illusory.
  • Manufacturing PMI ticked down in June to 50.7 vs. a prior reading of 51.3.
  • Overall Household Spending growth accelerated in May to -1.9% YoY vs. a prior reading of -3%.
  • 2Q11 Tankan Survey Results:
    • Large Manufacturers Index ticked down to -9 vs. a prior reading  of 6;
    • Large Non-Manufacturers Index ticked down to -5 vs. a prior reading  of 3;
    • Large Manufacturers Outlook came in flat at 2;
    • Large Non-Manufacturers Outlook ticked down to -2 vs. a prior reading  of -1;
    • All Industry CapEx Guidance ticked up to +4.2% vs. -0.4% prior vs. consensus expectations of +2.4%.

India

  • The Centre for Monitoring the Indian Economy reported that due to tighter credit conditions, the number of stalled corporate projects grew +18.1% YoY in 1Q11 alongside a -9.3% YoY contraction in the number of new projects announced.
  • Food Inflation slowed to +7.8% YoY vs. a prior reading of +9.1% in the week ending June 18.
  • Energy Inflation accelerated to +13% YoY vs. a prior reading of +12.8% YoY in the week ending June 18.
  • The central government’s recent decision to remove crude oil import duties and the Finance Minister’s affirmation of his lofty growth assumptions is raising concern that the government will fail to meet its deficit reduction target.
  • HSBC Manufacturing PMI fell to the lowest level in nine months in June (55.3 vs. a prior reading of 57.5).

South Korea

  • Bank of Korea Manufacturing Business Survey declined in July to 90 vs. a prior reading of 97.
  • Bank of Korea Non-Manufacturing Business Survey declined in July to 84 vs. a prior reading of 86.
  • The Finance Ministry increased its full-year inflation forecast +100bps to +4% YoY while lowering its growth forecast -50bps to +4.5% YoY.
  • Slowing growth and accelerating inflation have caused President Lee Myung Bak’s approval rating to drop to 28.8% in June vs. 76% when he came into power in February of 2008.
  • CPI accelerated in June to +4.4% YoY vs. +4.1%.
  • Slowing Export growth (+14.5% YoY) caused South Korea’s Trade Balance to contract -$3.5 billion on a YoY basis.

Singapore:

  • Industrial Production growth slowed meaningfully in May: -17.5% YoY vs. a prior reading of -9.5% YoY.
  • The Monetary Authority of Singapore set capital levels for domestic banks +200bps above Basel III standards, further strengthening the health of its highly-rated banking sector (three banks in the top six globally per a June Bloomberg Markets analysis).

Thailand

  • The controversial Pheu Thai, leading in the polls ahead of Sunday’s election has pledged more populism and hinted at a potential currency devaluation if elected.
  • Slowing Export growth (+17.3% YoY) and faster Import growth (+34.4% YoY) caused Thailand’s Trade Balance to contract -$2 billion on a YoY basis.
  • Headline CPI slowed in June to +4.1% YoY vs. a prior reading of +4.2%. Core CPI accelerated to +2.6% YoY vs. a prior reading of +2.5%.

Indonesia

  • CPI slowed in June to +5.5% YoY vs. a prior reading of +6%.
  • Accelerating Export growth (+45.3% YoY) helped Indonesia’s Trade Balance expand +$1.4 billion on a YoY basis.

Australia

  • AIG Performance of Manufacturing Index jumped to 52.9 in June vs. a prior reading of 47.7.

PRICE ACTION

Amid the mixed-to-sour economic data, Asian currencies, equity markets, long-end bond yields, and 10Y-2Y spreads exhibited broad-based signs of bullishness on a week-over-week basis – likely due in part to the perceived “resolution” in Greece. Asian credit had a strong week as well, from both a spreads and swaps perspective.

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 1

 

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 2

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Weekly Asia Risk Monitor: Party On or Premature Celebration? - 15

 

CORRELATIONS

The following tables showcase the outputs of multi-duration regressions with various assets throughout Asia and select key Global Macro indices (the independent variables are denoted in yellow at the top right corner of each table). A couple of key callouts are the breakdown in the positive correlations between Greek 2Y yields and Asian currencies YTD, as well as a developing trend of high inverse correlations between the CRB Raw Industrials Index and Asian CDS.

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 7

 

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 8

 

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 9

 

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 10

 

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 11

 

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Weekly Asia Risk Monitor: Party On or Premature Celebration? - 13

 

Weekly Asia Risk Monitor: Party On or Premature Celebration? - A

Happy Fourth of July weekend,

Darius Dale

Analyst