Asian shares guarded before China data

China's GDP could depress risk appetite, market sentiment may weaken further

Asian shares marked time with small gains on Friday ahead of China's second-quarter gross domestic product figures which could depress risk appetite while a Moody's downgrade of Italy's credit rating threatened to rekindle worries over Europe's debt crisis.

Moody's Investors Service lowered Italy's government bond rating by two notches on Friday, just as a pullback in yields on Italian and Spanish debt had raised hopes that Italy's borrowing costs at a Friday auction could ease further.

China's GDP, due around 0200 GMT, will likely show a 7.6% increase, its slowest growth in more than three years.

Market players will scrutinise the data for clues to the possible pace of Beijing's future stimulus measures, which will affect sentiment for riskier assets, given huge demand for resources and broad-based goods in the world's second largest economy.

"A dismal print may fuel concerns for a 'hard landing', and market sentiment may weaken further," said David Song, currency analyst at DailyFX.

MSCI's broadest index of Asia-Pacific shares outside Japan nudged up 0.1% after slumping 2.2% to this month's low and logging its biggest daily loss in nearly two months on Thursday.

Japan's Nikkei average opened down 0.2 % after falling 1.5% on Thursday for its biggest daily drop since June 8 and a sixth consecutive day of declines -- the longest such streak since early April.

Shares in Australia, which relies on China as its top trade partner and consumer of resources, edged up 0.3%.

NEGATIVE SURPRISE

US stocks fell on Thursday, hit by more warnings in the technology sector, while European shares sank on worries over a gloomy global economic picture, highlighted by a surprise rate cut in South Korea, weak Australian jobs data and a lack of signs that the Federal Reserve would step up its easing anytime soon.

"We see the negative surprise from (China's) GDP as more important to the market, adding further downside pressure to risky assets," said Barclays Capital analysts in a research, adding that the Australian dollar and the New Zealand dollar were among the most vulnerable currencies.

San Francisco Federal Reserve Bank President John Williams said on Thursday that the US central bank would likely undershoot its goals for inflation and employment for several years, adding that if his forecast pans out he would support more bond purchases to boost the economy.

Ahead of the Chinese data, the commodity-linked Australian dollar moved away from all-time highs against the euro and stayed near a two-week low against the US dollar.

The euro inched down 0.1% to $1.2187, not far away from a two-year low of $1.2166 hit on Thursday.

The dollar index, measured against a basket of major currencies, hovered near a two-year high reached on Thursday.

The CBOE Volatility index, which measures expected volatility in the Standard & Poor's 500 index  over the next 30 days, rose 2.1% on Thursday to its highest this month as risk aversion heightened.

On the flip side, 10-year Japanese government bond yield fell to a fresh nine-year low of 0.76% early on Friday. The 10-year US Treasury yield remained within striking distance of the historic low of 1.44% hit in early June.

But gold, another typical safe-haven asset, failed to benefit from investors fleeing risk as bullion's correlation with the dollar has overtaken its safety appeal in recent weeks.

Spot gold was down 0.2% at $1,567.54 an ounce.

Brent crude oil fell 0.4% to $100.66 a barrel after rising above $101 on Thursday, and US crude fell 0.4% to $85.70 a barrel.

Italian three-year borrowing costs were expected to retreat below 5% at a bond auction on Friday as euro zone market strains eased somewhat after Spain unveiled more austerity steps and euro zone finance ministers agreed to grant Madrid the first batch of bailout for its troubled banks by the end of July, but pressures could rise after the Moody's downgrade.