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Published: Monday July 16, 2012 MYT 12:07:00 PM

Shares extend rally on China relief, Bernanke next focus


TOKYO: Asian shares extended their rally on Monday as fears of an economic hard landing in China subsided, with Premier Wen Jiabao raising the prospect of more policy stimulus if needed.

With worries about China off the boil, the markets focus is shifting to the next policy move from the United States and a slew of corporate earnings from U.S. firms this week.

Gains in equities were capped and oil retreated from Friday's increases as traders awaited Federal Reserve Chairman Ben Bernanke's semi-annual testimony to the U.S. Congress on the economy set for Tuesday and Wednesday.

Markets will seek clues on the Fed's 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.

Bernanke is expected to repeat that the Fed will take further easing measures only if necessary, which could dampen hopes for more immediate stimulus and weigh on risk appetite while supporting the dollar.

"Markets are settling back into wait-and-see mode ahead of testimony by Fed Chairman Bernanke to US lawmakers on the state of the economy and potentially, the central bank's policy options," ANZ Bank said in a research note.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> inched up 0.3 percent after jumping 1 percent on Friday. The materials sector <.MIAPJMT00PUS> led the gains, followed by the energy sector <.MIAPJEN00PUS>.

The resource-reliant Australian equity market <.AXJO> was Asia's top performer with a 0.7 percent gain as worries about China's economy eased. China is Australia's largest trade partner.

But Chinese shares lagged as profit warnings continued to pour in from mainland firms hit by the slowdown in demand at home and abroad.

Hong Kong shares <.HSI> edged higher but were weighed down by warnings from firms such as ZTE Corp <0763.HK> <000063.SZ>, China's second-largest telecoms equipment maker, and falling shares in Asia's largest developer, Sun Hung Kai Properties <0016.HK>, after the billionaire brothers who run the company were charged in a bribery case. Shanghai shares <.SSEC> lost 1 percent.

Japanese markets were closed on Monday for a public holiday.

China on Friday reported that second-quarter gross domestic product grew 7.6 percent from a year earlier, in line with expectations.

But the relief rally that followed the data suggested markets were largely short covering from oversold conditions, as risk appetite has been curbed by concerns about corporate earnings, and the protracted euro zone debt crisis adding to global economic uncertainty.

"The market's next focus is on Bernanke and investors will be combing through a slew of earnings in the mean time, but forecasts have already been notched down several times in the run-up, so there won't be any big disappointments barring a significant shortfall," said Lee Seung-wook, an analyst at Kiwoom Securities, about the Korean equities market.

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.

Oil pared earlier gains, after settling up more than $1 on Friday, with Brent crude down 0.1 percent at $102.30 a barrel and U.S. crude easing 0.5 percent at $86.70.

EUROPE JITTERS

The euro nudged up from its two-year low of $1.2162 hit on Friday, trading at $1.2239 on Monday.

Investors remain wary about 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 percent.

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.

As flight to safety pushed government bond yields in the United States and Germany to or near record lows and to nine-year lows in Japan, yield-hungry investors sought returns in High Yield and Emerging Market Bond Funds in the second week of July, EPFR Global said on Friday.

Bond Funds collectively took in $4.87 billion during the week ending July 11 -- an eight week high that pushed year-to-date inflows over the $200 billion mark -- while Equity Funds posted net outflows of $327 million, EPFR said. - Reuters

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