Asian shares gain, count on Fed's support

By Hideyuki Sano

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

Yet, with elevated prices on Wall Street and elsewhere relying substantially on support from low interest rates, many investors were now focusing on Federal Reserve Chair Janet Yellen's testimony to 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.

European shares are expected to tick down after hefty gains on Monday, with French shares seen dipping as much as 0.2 percent and Britain's FTSE and Germany's DAX by 0.1 percent.

In Asia, Japan's Nikkei average rose 0.7 percent while South Korea's Kospi gained 1.0 percent. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.2 percent.

Asian stock markets showed little reaction to stronger-than-expected new loan and money supply data for China. Chinese banks gave 1.08 trillion yuan ($173.90 billion) of new loans in June, beating expectations of 915 billion.

The data, coming ahead of GDP and other numbers from China due on Wednesday, underscored the perception that the Chinese economy is stabilising after a shaky start to the year but still needs more policy support to meet Beijing's growth target.

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 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 licked its wounds after the biggest fall in 7-1/2 months on Monday as the 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. It traded at $1,306.80 per ounce, having fallen as low as $1,302.90 on Monday.

As risk appetite returned, the 10-year U.S. Treasury yield rose back to 2.541 percent from a five-week low of 2.494 percent last week.

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 look for 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 ultra-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 $1.3620 and the yen changed hands at 101.55 to the dollar, both stuck in their recent ranges.

The yen showed no reaction to the BOJ's widely expected decision to keep its policy on hold and broadly maintain its economic forecasts, with the focus now on Governor Haruhiko Kuroda's upcoming news conference.

Elsewhere, U.S. crude oil 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 prompted a rebound to around $101.

(Editing by Eric Meijer and Alan Raybould)