GLOBAL MARKETS-China pulls Asia stocks up for 5th day; euro dips

Mon Jul 4, 2011 2:31am EDT

* Chinese shares up 1.6 pct; Nikkei briefly tops 10,000

* Long-only Funds seeing buying China shares

* Thai shares jump, currency rises after election results

* Asia-focused equity funds snap outflow streak - EPFR Global

By Saikat Chatterjee

HONG KONG, July 4 (Reuters) - Asian equities climbed a fifth consecutive session on Monday, led by Chinese stocks, though the euro turned lower after ratings agency S&P warned that any rollover of Greek's debt would constitute a default.

After two weeks of gains, equities were on a strong footing as fears eased about a sharp slowdown in emerging market giants such as China and a drop in commodity prices like oil boosted demand for risky assets after a rocky first half.

One trader at a Hong Kong-based brokerage said long-only buyers were stepping back into the market, signalling a shift from the prior quarter where institutions were largely on the sidelines and trading volumes on major exchanges stayed anemic.

The Shanghai composite index, which is still down year-to-date, rose 1.6 percent on Monday after data last week showed China's manufacturing growth moderated in June, raising expectations that the economy may not be heading into a sharp slowdown due to excessive tight monetary policy.

A U.S.-based macro fund was also spotted buying into Chinese banks - a sector often considered a proxy for the economy and one which has a large enough weighting to lift the broader market.

The China Enterprises index of top mainland firms listed in Hong Kong, the most common way for foreign investors to invest in China, rose 2.2 percent.

"There has been a significant multiple contraction in PE (price-earnings) terms which means that market (China) is emblematic of the overall cheapness of the region," said Jonathan Garner, head of global emerging markets strategy at Morgan Stanley.

"So we do expect China to do better both in absolute and relative terms in the second half," he said, adding that the bank is overweight on the materials, energy and financial sectors.

Though headline PMI data dipped, underlying investment trends remain strong and inflation is set to ease in the second half following a moderation in economic activity, Merrill Lynch strategists said.

They expect the Chinese economy to grow by more than 9 percent in 2011 -- much higher than a so-called "hard landing" scenario growth of around 7 percent.

Offering yet another ray of optimism for cautious-minded investors was a batch of U.S. manufacturing data that suggested the world's biggest economy may be recovering strongly from a recent spell of weakness.

Japan's Nikkei ended up one percent, briefly rising above 10,000 points level for the first time in two months, while Australian stocks gained 0.4 percent.

The MSCI index of Asia-Pacific shares outside Japan rose 1.2 percent, touching its highest level since early June, adding to two consecutive weeks of gains.

In Thailand, the baht strengthened and local shares gained more than 4 percent after the clear majority obtained by the Puea Thai party suggested that possibility of post-election instability looked less likely in the short-term.

Flows data painted a cheery picture. EPFR Global-tracked Emerging Markets Equity Funds snapped a three week outflow streak heading into July with Asia ex-Japan and the diversified Global Emerging Markets (GEM) Equity Funds both taking in over $1 billion while outflows from high yield bond funds slowed.

U.S. markets are shut on Monday for a holiday.

EURO WEAKENS

The euro erased early gains and held near the day's lows after ratings agency S&P said a debt rollover plan may put Greece in a selective default. The single currency had reached a one-month high of $1.4580 earlier in the day

Moreover, even though the latest disbursal of emergency funds calms nervous investors for now, Greece faces an uphill task in trying to implement the reforms demanded by international lenders which means the euro's path will be a rocky one.

Broadly, it remained hemmed inside a broad range established since early May.

Euro zone finance ministers on Saturday approved a 12 billion euro instalment of Greece's bailout and said details of a second aid package for Athens would be finalised by mid-September.

For now, markets will focus on a European Central Bank policy rate decision on Thursday where it is widely expected to raise interest rates though players will be more interested in knowing the future trend of rate hikes, particularly in the backdrop of weak data from Germany.

Improved appetite for risk and the end of the Federal Reserve's quantitative easing policy reduced demand for U.S. Treasury bonds, with yields on 10-year notes settling at 3.18 percent, near its highest in almost two months and adding to a weekly rise of more than 30 basis points.

U.S. crude futures CLc1 were trading above the $95 per barrel mark, holding on to last week's gains, despite a surprise move by the 28-nation International Energy Agency to release 60 million barrels of oil reserves.

Elsewhere, precious metals like gold and silver eked out meagre gains in thin trading.

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blogs.reuters.com/hedgehub (Additional reporting by Vikram Subhedar; Editing by Richard Borsuk)

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