Asian Market Update

Daily Forex Fundamentals | Written by Trade The News | Jul 14 08 05:10 GMT |

Treasury to lend to Fannie and Freddie, Bush backs Israel plan for strike on Iran

U.S. Treasury Secretary Paulson on Sunday asked Congress to approve a rescue package that would give officials the power to inject billions of federal dollars into Freddie and Fannie through investments and loans. The Fed also announced it would make one of its short-term lending programs available to the two companies. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300B, according to the New York Times. To 'protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards,' said Paulson.

Market reaction to the FNM/FRE news: It looks like the market was prepared for a worst-case scenario for the mortgage giants, and the knee-jerk reaction was to celebrate and buy the USD and U.S. stocks futures on the back of the announcement. Some traders were puzzled by the sharp market movement on the news, because the details of the package were already leaked through newspaper articles in the WSJ and the FT over the weekend. It looks like the USD will continue to struggle in the near-term, unless these announced measures are perceived as likely to bring FNM and FRE back to health. Focus now shifts to Fed chairman Bernanke's semi-annual testimony to Congress on Tuesday, where he will be questioned on the prospects for the U.S. economy and health of the financial system. Overall, Asia took the news as a positive, but European markets may take a different view. Some analysts say the U.S. government is signaling it won't throw a lifeline to struggling financial companies apart from Fannie Mae and Freddie Mac, marking a shift to a new and potentially more volatile phase of the credit crisis. 'The credit crisis has obviously entered into a new phase - the government has one bailout left in them, and this is it,' said Jeffrey Gundlach at TCW Group, in an interview with AP. 'One consequence of Freddie and Fannie is that other firms are allowed to go under,' he said.

President Bush tells the Israeli government that he may be prepared to approve a future military strike on Iran: President George W Bush has told the Israeli government that he may be prepared to approve a future military strike on Iranian nuclear facilities if negotiations broke down, according to a senior Pentagon official quoted in The London Times. 'It's really all down to the Israelis,' the Pentagon official added. 'This administration will not attack Iran. This has already been decided. But the president is really preoccupied with the nuclear threat against Israel and I know he doesn't believe that anything but force will deter Iran.'

New Zealand retail sales fall at fastest pace in four years in May: (NZ MAY RETAIL SALES MOM: -1.2% V -0.1% expected, 1.0% prior; EX-AUTO: 0.7% V 0.5% expected, -0.5% prior) Retail sales fell a seasonally adjusted -1.2% in May, the biggest monthly decline since February 2004, led by lower car and furniture sales, Statistics New Zealand data showed. Analysts now shift focus to tomorrow's inflation data, with money markets pricing in a 50/50 chance of a rate cut at the RBNZ's next review on July 24.

New Zealand's service sector at a 16 month low: (NZ JUNE PERFORMANCE OF SERVICES INDEX: 45.6 V 49.1 prior) Business NZ chief executive Phil O'Reilly said the latest result was consistent with the general downturn of the Kiwi economy. Analysts also talked about the weaker than expected employment subcomponent. 'This fits with a number of other measures that warn us the jobs market is about to come off the boil much more obviously than has been the case in the official records to date,' said Craig Ebert at Bank of New Zealand.

Equities: At 0:08 EDT Japan's Nikkei is +0.69%, the S&P/ASX200 is -0.80%, South Korea's KOSPI is -0.07%, and the Shanghai composite index is +0.34%. The S&P500 future contract gained +0.86% since Friday's close, last trading at 1,250.50. A rising USD/JPY inspired investors to buy the battered Japanese exporters, pushing the Nikkei above 13,100. But the Nikkei's upside looks limited, with many Asian investors staying on the sidelines and awaiting Wall Street's reaction to the FNM/FRE news. Retailers, selected resource stocks and banks dragged the S&P/ASX200 index lower, with the index finding support around 4,940. South Korea's Posco Steel reported solid earnings results, but offshore events continue to dominate price action in Seoul.

Commodities: Nymex crude oil sold off in the early Asian morning, but the commodity rebounded back to $145/bbl. Oil prices look set to move higher, with energy traders betting that the USD will remain under pressure this week. Spot gold rose +0.50% between 18:00 EDT and 0:04 EDT, last trading at $965.40/oz.

Other news: The U.S. Federal Deposit Insurance Corporation has suspended service at IndyMac Bank, one of the largest U.S. mortgage originators, after a bank run from depositors. IndyMac had $19B of deposits as of March 31, and the bailout could cost the FDIC 7.5%-15% of its insurance fund. Some analysts think the Indymac suspension would result in an increase in insurance costs for all U.S. banks, and a New York Times article suggests that up to 150 U.S. banks could fail or seek mergers over the next 12-18 months.

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