Asian shares gain, count on Fed's support

TOKYO (Reuters) - Asian shares rose on Tuesday after Citigroup's earnings and a fresh round of merger and acquisition activity in the US healthcare industry lifted global share prices.

Yet, with elevated stock prices on Wall Street and elsewhere relying substantially on support from low interest rates, many investors now look to Federal Reserve Chair Janet Yellen's testimony in a US Senate committee.

"Markets expect her to stick to the stance that she will guide policy by watching the pace of recovery in the job market and the economy," said Hirokazu Kabeya, senior strategist at Daiwa Securities.

Asian stock markets showed little reaction to stronger-than-expected new loan and money supply data for China. Chinese banks lent 1.08 trillion yuan (S$215.90 billion) worth of new yuan loans in June, beating expectations of 915 billion yuan, central bank data showed on Tuesday, as Beijing stepped up efforts to stimulate the economy.

After a shaky start to the year, China's economy has recently shown signs of steadying as a series of government stimulus measures kick in, but many economists believe more policy support may still be needed to sustain a recovery. Second-quarter GDP data will be released on Wednesday.

Japan's Nikkei average rose 0.7 per cent while South Korea's Kospi gained 0.8 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.2 per cent.

US stocks ended higher on Monday, with the Dow Jones industrial average hitting an intraday record, helped by Citigroup's better-than-expected earnings and more deals in the healthcare sector.

Investors also put aside concerns about euro zone banks for now, as Portugal's biggest bank reassured investors of its stability, despite recent difficulties.

Portuguese 10-year bond yields fell to 3.83 per cent, retreating further from a six-week high above 4 percent hit last week after disclosures of financial problems at a web of family-held holding companies behind Banco Espirito Santo.

Gold licked its wounds after the biggest fall in 7 1/2 months on Monday as fading fears over Portugal's banking sector and a gain in U.S. equities prompted investors to take profits after bullion's rally to 3-1/2 month highs last week.

Gold traded at US$1,306.80 per once, having fallen to as low as US$1,302.90 on Monday.

As risk appetite returned, the 10-year US Treasury yield rose back to 2.541 per cent from low of five-week low of 2.494 per cent hit last week.

US bond yields have been kept low as the Fed has signalled it plans to keep interest rates around zero even after it finishes tapering its stimulus programme.

Yellen's testimony gives bond traders a chance to try to find clues on when and how the Fed plans to raise interest rates, after the minutes of the Fed's last meeting showed policymakers discussed exit strategies from its current loose policy.

A shift in the U.S. rate outlook could have a big impact on asset prices. "While Yellen dismissed the recent rise in inflation as "noise", our economists believe that inflationary pressures are building in a sustainable fashion and investors may be forced to start pricing in a more aggressive pace of hikes later this year," Sreekala Kochugovindan, an analyst at Barclays wrote in a report.

Major currencies hardly budged ahead of Yellen's comments. The euro stood at US$1.3620 and the yen changed hands at 101.55 to the dollar, both stuck in their recent ranges.

The Bank of Japan will conclude its policy meeting on Tuesday, but no policy change is expected.

Elsewhere, U.S. crude futures hit a nine-week low of US$100.22 per barrel on Monday on signs of improving supply from key producers but renewed violence in Libya helped them rebound to around US$101.

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