Asian shares extend rally on China relief, Bernanke next focus

Asian shares extended their rally on Monday as fears of an economic hard landing in China subsided, with last week's softer growth data within expectations and Premier Wen Jiabao on Sunday raising the prospects of more policy stimulus if needed.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS inched up 0.3 percent after jumping 1 percent on Friday. But the index marked its steepest weekly loss in two months, slumping to its lowest level for July on worries about decelerating global growth.

Japanese markets are closed on Monday for a public holiday.

China's growth rate slowed for a sixth successive quarter to its slackest pace in more than three years, underscoring the need for more policy action even as signs emerged that Beijing's steps taken so far were underpinning the economy.

China's Wen said efforts to stabilize the economy are working and the government will beef up steps in the second half of 2012 to boost policy effectiveness and foresight, the official Xinhua news agency reported on Sunday.

Its year-on-year 7.6 per cent growth in the second quarter fell largely within expectations, spurring relief across asset classes, lifting European shares to their highest close in more than a week on Friday and U.S. stocks to snap a six-day losing streak.

U.S. shares were also buoyed by earnings from JPMorgan Chase & Co (JPM.N) that eased fears about the long-term impact of trading losses that cost the bank $5.8 billion for the year. A bleak outlook for second-quarter corporate earnings has also been weighing on sentiment as a protracted euro zone debt crisis helped deepen global economic conditions to deteriorate further.

"Expectations have been beaten down quite a bit, displayed by the strong rebound triggered by China's in-line growth data, so there likely won't be any large scale disappointments from sluggish earnings this week," said Jeon Jong-kyu, an analyst at Samsung Securities, about the Korean equities market.

Commodities-linked currencies such as the Australian dollar, which typically are used as a gauge for risk appetite, steadied while the euro nudged up from its two-year low of $1.2162 hit on Friday, trading at $1.2246 on Monday.

Oil extended gains after settling up more than $1 on Friday, with Brent crude up 0.5 per cent at $102.89 a barrel and U.S. crude steady at $87.08 a barrel on Monday.

BERNANKE, EUROPE EYED

Markets will seek clues from the Federal Reserve this week on its stance over a stronger monetary policy to support the U.S. recovery, after central banks from Europe, China and Brazil earlier this month cut interest rates to bolster fragile growth.

Fed Chairman Ben Bernanke is expected to repeat that the Fed will take further easing measures only if necessary, when he faces semi-annual testimony to the U.S. Congress on the economy on Tuesday and Wednesday.

"Market may find it disappointing and is likely to be USD-supportive," analysts at Barclays Capital said in a client note.

Investors will also keep monitoring whether borrowing costs in highly-indebted Spain and Italy would start to climb again.

Italian banks shrugged off Moody's downgrade of Italy's credit rating to near-junk status and helped Rome sell the maximum amount of bonds it was targeting at an auction on Friday, lowering three-year bond yields to their lowest since May. But 10-year yields rose to near 6 per cent.

Reflecting investor jitters over the euro, currency speculators raised their bets in favor of the U.S. dollar in the latest week, while boosting their positions against the euro to their highest in a month, data from the Commodity Futures Trading Commission showed on Friday. 

Ahead of a meeting of euro zone finance ministers later this week, Chancellor Angela Merkel said on Sunday she was confident that a majority of German lawmakers would back aid for Spain's ailing banking sector at a special sitting of the lower house Bundestag set for Thursday.

Euro zone finance ministers agreed earlier this month on a rescue package of up to 100 billion euros for ailing Spanish banks, but the German government needs a parliamentary approval before it can commit to pay its share of the bailout at the euro zone meeting, set for this Friday.

Copyright @Thomson Reuters 2012