GLOBAL MARKETS-Asian shares gain but China worries linger, dollar firm

Mon Jul 8, 2013 11:57pm EDT

* Asian shares track gains in Wall Street

* Concerns about Beijing's tough credit stance weigh

* Dollar off 3-year high on profit-taking, uptrend seen intact

By Hideyuki Sano

TOKYO, July 9 (Reuters) - Asian shares rose on Tuesday, tracking a rally on Wall Street spurred by strong U.S. job data last week, though gains were capped by investors' nervousness over Beijing's drive to reform credit and the implications of tighter U.S. monetary policy.

The U.S. dollar clung near a three-year high against a basket of currencies despite profit-taking after its strong rally sparked by strong U.S. employment data last Friday.

"Investors are moving more cautiously ahead of the earnings season. The market is also still in the process of gauging whether strength in the U.S. job data last week was a good thing or a bad thing," said Chung Seung-jae, a market analyst at Mirae Asset Securities.

"Investors are still unsure whether signs of economic improvement in the U.S. is better for the market than the premature reduction of Fed stimulus," Chung added.

Japan's Nikkei share average rose 1.3 percent, edging close to the six-week high hit on Monday, while MSCI's Asia-Pacific ex-Japan index rose 0.8 percent.

Chinese shares were softer, however, with the CSI300 of the leading Shanghai and Shenzhen A-share listings dipping 0.4 percent after a 2.8 percent fall the previous day.

China shares had their worst day in two weeks on Monday, after China's leadership laid out plans to ensure banks would support an economic rebalancing to more efficient, high-end manufacturing from ageing industries facing overcapacity and extravagant investment funded by cheap debt.

Data showed on Tuesday China's annual consumer inflation accelerated more than expected in June as food costs soared, limiting any near-term room for the People's Bank of China to loosen policy to underpin the slowing economy.

Beijing will release trade data on Wednesday and second-quarter GDP numbers on Monday.

TUG OF WAR

Asian shares have been hit by a double whammy of worries over a slowdown in China and tighter U.S. monetary policy.

"It is emerging market shares, rather than U.S. shares, that have taken the brunt of a likely reduction in the Fed's asset purchases. If U.S. bond yields are higher, investors do not need to go to emerging market for yields," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

"We are going to see a tug of war between strong U.S. shares and softer emerging economy shares. The ultimate question is whether tighter U.S. policy will damage emerging economies to the extent that it will hurt global growth," she added.

EARNINGS

Wall Street shares extended their bull run on Monday, with Standard & Poor's 500 Index gaining 0.53 percent to 1,640.46, with market focus shifting to upcoming earnings.

After the market's close, Dow component Alcoa Inc, the largest U.S. aluminium producer, reported a larger-than-expected quarterly profit, excluding one-time items such as restructuring costs and legal expenses, kicking off the earning season.

Its stock slipped 0.2 percent after hours, after having risen 1.4 percent in the regular session.

The dollar index, which measures the value of the greenback versus a basket of six major currencies, stood flat at 84.305, not far from Monday's high of 84.588, its strongest since July 2010.

"On the whole, the dollar is likely to gain further and U.S. yields are likely to rise given the Fed's policy outlook," said Sumitomo Mitsui Trust's Sera.

Expectations that a stronger U.S. economy will give the Fed room to begin tapering its bond-buying, most likely in September, have sparked a nearly 5 percent rally in the dollar since mid-June and sharp rise in U.S. bond yields.

The 10-year U.S. notes yield had risen as high as 2.755 percent on Monday, though bargain-hunting pushed it back to 2.653 percent.

Investors will be looking for more clues on the Fed's plans in a speech by Chairman Ben Bernanke on Wednesday.

Oil futures dipped, slipping from their Monday's multi-month high as the announced returns of a Libyan oilfield and an Iraqi pipeline eased concerns about global oil supplies sparked by unrest in Egypt.

Gold extended a rebound to a second day after breaking through a key technical level and as China inflation data boosted its appeal as a hedge against rising prices in the world's second-biggest buyer of the metal.

Spot gold XAU= rose 1.2 percent to $1,250.86 an ounce by 0301 GMT.

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