Asian shares firm, count on Fed's support

By Hideyuki Sano

TOKYO (Reuters) - Asian shares were firm on Tuesday after Citigroup's earnings and a fresh round of merger and acquisition activity in the U.S. 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 U.S. 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.

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

Japan's Nikkei average and South Korea's Kospi both rose around 0.6 percent. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.1 percent.

U.S. 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 percent, 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 prices also fell 2.4 percent on Monday, its biggest daily fall since December, 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 $1,306.80 per once, having fallen to as low as $1,302.90 on Monday.

As risk appetite comes back, the 10-year U.S. Treasury yield rose back to 2.547 percent from low of five-week low of 2.494 percent hit on Friday.

U.S. 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 policy makers indeed 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.

In Asia, the Reserve Bank of Australia will release the minutes of its July policy meeting while the Bank of Japan holds its policy meeting although no policy change is expected.

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

(Editing by Eric Meijer)