Tokyo - Asian shares and the Australian dollar jumped on Friday after China's second-quarter gross domestic product data landed in line with forecasts, offsetting worries that a slowdown in China could undermine fragile global growth.
But market relief could be short-lived as Moody's downgrade of Italy's credit rating to near-junk status just ahead of a bond auction threatens to intensify fears over Europe's debt crisis.
European stocks were expected to keep Asia's positive tone, with financial spreadbetters calling the main indexes in London , Paris and Frankfurt to open up as much as 0.7%. US stock futures rose 0.3%.
China's economy grew 7.6% in the April-June quarter from a year earlier, matching forecasts, but at its slowest pace in three years and confirming expectations of a downward trajectory that leaves full-year growth on course for its softest showing since 1999.
"The GDP growth is within market expectations and lifts a weight off investors' minds about a further slowing in China's economy," said Li Huiyong, economist at Shenyin & Wanguo Securities in Shanghai.
MSCI's broadest index of Asia-Pacific shares outside Japan jumped as much as 1%. Still, it was set for its steepest weekly loss in two months as the index earlier in the week slumped to its lowest for July on worries about deteriorating economic conditions around the world, and a bleak outlook for second-quarter corporate earnings.
Hong Kong shares extended gains to rise 0.5% from 0.1% prior to the GDP news while the China Enterprises Index of the top Chinese listings in Hong Kong rose 1.2%. The respite was short-lived in Shanghai shares, which held flat after swinging between gains and losses. Investors remained wary of weak corporate profits.
Shares in Australia, which relies on China as its top trade partner and consumer of resources, advanced further to rise 0.6% while the Australian dollar rose as high as $1.0175 from around $1.0135.
Market players scrutinised the Chinese 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 in the world's second largest economy.
"People were looking for figures below consensus expectations anyway, so the number won't change the situation that much," said Guy Stear, head of research with Societe Generale in Hong Kong. "What you read into these numbers is that we need more policy support."
China also released June reports for fixed asset investment and retail sales, both of which slightly exceeded forecasts.
"These numbers suggest the government's past stimulus steps are taking effect and starting to put a brake on the slowdown, but the overall set of data showed scope for more policy support to ensure this trend takes hold," said Chiyuki Shiraiwa, economist at SMBC Nikko Securities.
Japan's Nikkei average inched up 0.1%, capped by bearish technicals after its decline in the past six sessions put the index below its 25-day moving average.
Moody's puts damper
Oil trimmed earlier losses, with Brent crude oil easing 0.1% at $100.97 a barrel after rising above $101 on Thursday, and US crude inching down 0.1% to $86.01 a barrel.
Sentiment could remain jittery as Moody's Investors Service lowered Italy's government bond rating by two notches on Friday to near-junk status, 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.
Italian three-year borrowing costs were expected to retreat below 5% at a bond auction on Friday as eurozone market strains eased somewhat after Spain unveiled more austerity steps and eurozone finance ministers agreed to grant Madrid the first batch of bailout funds for its troubled banks by the end of July, but pressures could rise after Moody's downgrade.
"It's probably going to be a factor weighing on Italian bond yields and weighing on European fears," said Shane Oliver, chief economist at AMP Capital Markets.
The euro was steady at $1.2200, 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.
As investors' risk tolerance remained low, safe-haven demand pushed 10-year Japanese government bond yield down to a fresh nine-year low of 0.76% on Friday. The 10-year US Treasury yield remained within striking distance of the historic low of 1.44% hit in early June.
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 steadied at $1 570.50 an ounce as the dollar index inched lower.
Asian credit markets were lacklustre, keeping the spread on the iTraxx Asia ex-Japan investment-grade index steady from Thursday.