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Conclusion: Asian financial markets, economic data, and official policy commentary continues to echo recent pessimism, which is ultimately reflexive in nature.



Asian equity markets completed another off week, closing down -2% wk/wk on a median basis. Hong Kong, our highest-conviction bearish thesis on the Asian equity front led decliners (-3.6% wk/wk). Asian currencies also broadly declined vs. the USD, closing down -0.5% wk/wk on a median basis. The Indian rupee was particularly weak, closing down -2.1%. FX-translation remains a key risk for U.S. investors on the emerging market front, as well as for emerging market corporations from a liability standpoint.

Asian sovereign debt markets continue to price in monetary easing, led by China’s -53bps wk/wk decline in 1yr yields. Australia, whose economic performance is highly correlated with Chinese demand, also saw yields decline on the short end of the curve to the tune of -29bps on the 2yr tenor. Both country’s interest rate swaps markets agreed with this dovish outlook, tightening -22bps and -23bps, respectively. Farther out on the sovereign debt maturity curve, the -18bps decline in Australia’s 10yr yield is noteworthy in the context of some “not-terrible” economic data from “down under” this week. Clearly the bond market isn’t impressed.

Asian 5yr credit default swaps markets were mixed for the first time in a while, widening a marginal +0.7% wk/wk. Notably, Chinese swaps widened +12bps (+9.4%) wk/wk, while Indonesia’s tightened -11bps (-4.8%) wk/wk – signaling to us a very short-term decoupling of risk perception throughout the region.


Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:

Global Growth Slowing:

  • Chinese October growth data largely slowed on the margin to at/near multi-year lows: retail sales (+17.2% YoY vs. +17.7% prior); industrial production (+13.2% YoY vs. +13.8% prior); YTD fixed asset investment (+24.9% YoY – flat); exports (+15.9% YoY vs. +17.1% prior); trade balance (-$10.1 billion YoY vs. -$2.4 billion prior); and M2 money supply (+12.9% YoY vs. +13% prior).
  • Continuing with the government’s recent focus on easing SME credit conditions, Chinese monthly loan growth accelerated in Oct +24.9% MoM to CNY586.8 – the largest sequential increase since March ‘11. It appears the communist party played a role in the acceleration, with nearly a third of the “big four” state-owned banks credit extension coming in the last two days of the month.
  • Hong Kong YoY real GDP growth continued to slow in 3Q (+4.3% vs. +5.3% prior). The latest reading is the lowest since 4Q09. Exports dropped -2.2% YoY in 3Q – a negative leading indicator for global demand. From a sequential perspective, Hong Kong narrowly skirted a technical recession, growing +0.1% QoQ (vs. -0.4% prior). On the release, officials lowered their 2011 GDP estimate to +5% from a previous range of +5-6%. This is following chief executive Donald Tsang’s bearish commentary earlier in the week: “I am pessimistic about short-term global growth. I am afraid a major eruption in the largest market in the world, i.e. Europe, is going to affect everyone on earth and Hong Kong cannot be totally exempted.”
  • India’s trade deficit widened in Oct to the highest in 17 years, as the near -11% decline in the rupee (vs. the USD) puts incremental pressure on import prices – particularly in the energy sector (India imports 3/4ths of its total crude consumption).  Industrial production growth came in at +1.9% YoY – the slowest rate since Sept ’09 – as the RBI’s +375bps or rate hikes over the last 18mo continues to stunt corporate investment.
  • As the floods continue to negatively impact economic growth in Thailand, consumer confidence in the economy fell -13% MoM in Oct to 62.8 – the lowest level in exactly ten years!
  • Malaysian industrial production growth slowed in Sep to +2.5% YoY vs. +3.7% prior. We’ve made this point in prior notes, but it’s worth repeating: If Asia is producing and shipping goods with less and less velocity, we (the developed world) are ordering and purchasing it with less and less velocity.

Deflating the Inflation:

  • Chinese CPI slowed to +5.5% YoY in Oct vs. +6.1% prior. PPI slowed as well: +5% YoY vs. +6.5% prior.
  • Japanese corporate goods prices (a proxy for PPI), slowed in Oct to +1.7% YoY vs. +2.5% prior.

King Dollar:

  • South Korea, a country sensitive to the global economic cycle continues to hold off on raising interest rates (currently at 3.25%) – despite real rates being in negative territory (-65bps) with headline CPI a mere 10bps below the high end of the central bank’s target range. We share the same view that the Korean won has been telling us for months (-4.5% over last 2mo) – their next step will be to ease, rather than tighten policy.
  • Indonesia, which has been the most aggressive on the easing front throughout Asia, lowered interest rates again, this time by -50bps to an all-time low of 6% in the reference rate. The move confounded all 19 economists surveyed by Bloomberg, suggesting to us that consensus is still not fully on board with our expectation of dovish monetary policy throughout the region over the intermediate term.
  • Australian Treasurer Wayne Swan confirmed our view that Australia will continue to see its interest rate and fiscal advantage deteriorate on the margin relative to the U.S. over the intermediate term, saying: “There is room to move in Australia when it comes to both monetary policy and fiscal policy” – suggesting to us that Gillard & Co. may join the RBA in easing “down under”.

Eurocrat Bazooka:

  • Japan bought 10% of the €3 billion EFSF issue earlier in the week, down from 20% of the fund’s initial 5yr sale back in January. A former BoJ official said that Japan may have reduced its demand on mounting fear of losses. We continue to maintain conviction that a) the EFSF is a mere transfer of Eurozone risk – an incomplete one at that; and that b) it will meet growing demand headwinds as France inches closer to a downgrade. Where will demand from EFSF paper come from going forward if both China and Japan (two largest FX reserves accounts) are leery of backing up the truck?


  • While certainly nothing to get excited about, Australia’s Oct economic data was surprisingly “not-terrible”. Payrolls growth slowed to +10.1k MoM, but the acceleration in full-time hires and the -10bps reduction in the unemployment rate was doubly encouraging. Trade balance growth accelerated ever-so-slightly to +A$600 million YoY alongside a similar acceleration in NAB business confidence to 2 (vs. -1 prior). Again, nothing to get excited about, but at least it is briefly inconsistent with the string of negative growth data we’d been seeing out of Asia recently.


  • Japanese optoelectronic producer Olympus Corp shares plunged after former CEO Michael Woodford exposed the company’s multi-decade fraudulent practice of hiding financial losses that have amounted to $1 billion to-date.
  • Japan, which is the largest foreign direct investor in Thailand (~57% of all recent projects), stands a risk of lost production as the Thai floods exacerbate auto, machinery, and electronic supply chains. Toyota became the latest company in a growing list to scrap full-year guidance as a result of the lack of visibility on production. The yen’s +6.8% gain vs. the USD over the LTM remains another key headwind to Japanese corporate earnings, and, ultimately, Japanese economic growth. The ratio of Japanese corporations’ planned capital expenditures abroad increased to 51.4% in FY12 – up from 39.5% in the prior year – as more businesses find it incrementally costly to produce and hire domestically.

Darius Dale


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