Encouraging Chinese data pulls Asian shares higher

Asian shares advanced on Monday as investors breathed a sigh of relief after encouraging Chinese data suggested the world's second-biggest economy may be starting to stabilise thanks to ramped-up stimulus from Beijing.

The positive mood appeared likely to spread, with early European trades showing the pan-region Euro Stoxx 50 futures up 0.1 per cent. Futures for Germany's DAX and France's CAC 40 rose 0.1 per cent each, while FTSE futures were flat. E-minis for the S&P500 added 0.1 per cent.

Second quarter economic growth slowed to 6.2 per cent from a year earlier, the weakest pace in at least 27 years, while separate data showed the country's industrial output and retail sales handily topped forecasts.

The promising monthly activity data suggested a flurry of stimulus measures from China have been able to prop-up domestic growth and offset some of the damage from a protracted trade war with the US, analysts said.

Equity markets were choppy in the wake of the Chinese data as some expected Beijing might temper further stimulus.

MSCI's broadest index of Asia-Pacific shares outside Japan reversed earlier losses to be 0.2 per cent higher. It fell a little more than 1 per cent last week, ending five straight weeks of gains.

Trading was light on Monday as Japan was shut for a public holiday.

Chinese shares were down before Monday's data release, after which they pared losses and then produced gains for the day. The blue-chip index gained 0.4 per cent for the day. Hong Kong's Hang Seng index was up 0.2 per cent. Australian shares lost 0.7 per cent, while South Korea's KOSPI slipped 0.2 per cent.

“Investors may be scaling back easing expectation upon today's data as fiscal measures appear to be working,” said Westpac analyst Frances Cheung.

“That said, we believe the PBoC will still be supportive of liquidity. Expect yields to be stable and any temporary bearishness to be expressed via swaps.”

Later in the week, US retail sales and industrial production data will provide clues about the health of the world's largest economy. The US Federal Reserve will release its 'Beige Book' on Wednesday, which investors will scour for comments on how trade tensions were affecting the business outlook.

In currency markets, the Australian dollar, often played as a liquid proxy for the Chinese yuan, jumped after the data to a high of $0.7033, a level not seen since July 4. It was last up 0.2 per cent at $0.7030.

The greenback was barely changed at 96.841 against a basket of major currencies. The dollar index fell for three days in a row as markets fully priced in the chance of a 25-basis-point (bps) cut to US interest rates. There is also a small probability of a 50 bps cut.

Against the Japanese yen, the dollar ticked up from near the lowest since early June at 108.01, while the single currency paused at $1.1272 after three successive sessions of gains.

Expectations that the Fed will keep rates supportive have sent bonds rallying with yields on 10-year US Treasuries now below the current Fed rate range of 2.25-2.50 per cent.

“Dovish Fed rhetoric has rendered a July rate cut, in the market's eyes, as a fait accompli: it's not if they cut but by how much,” Morgan Stanley strategist Hans Redekar told clients in a note.

Redekar said the bank was re-entering its short dollar/ long yen position.

“If markets are disappointed, the yield curve would likely flatten, the USD strengthen, and financial conditions tighten. These forces would exacerbate the already considerable headwinds facing the global economy,” he added.

“Global reflation requires a weaker USD to bolster global trade and commodity prices.”

Worries about world growth, low inflation and ongoing Sino-US trade tensions have meant investors are piling money onto bonds and money market funds, Jefferies said, citing its global asset fund flows tracker.

“The danger is that with a mountain of cash parked in money market funds any trade ceasefire would cause a huge shift away from safe assets,” said Sean Darby, Jefferies' global equity strategist.

“Presently, investors don't seem to be in any particular rush to buy equities, earnings revisions have yet to bottom out, while economic surprises have been rare,” he added.

“The bottom line is that we would issue a pause on the risk rally.”

In commodities, US crude fell 21 cents to $60 a barrel. Brent crude was off 10 cents at $66.62.

Gold slipped to 1,414.25 an ounce, drifting away from a recent six-year top of $1,438.60.

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