Asia stocks rally continues on policy hopes

By Kevin Plumberg

HONG KONG (Reuters) - Asian stocks rose for a fifth straight day on Monday on hopes policy efforts to dampen the impact of the financial crisis would ultimately take hold, though data still painted an ugly picture of the global economy.

Investors were also cautiously shopping for bargains after shares and commodity prices globally in October posted their biggest decline ever on fears of a deep recession in the world economy.

Major European stock markets were expected to open up as much as 2.5 percent, according to financial bookmakers, with momentum seen carrying over from Asia.

Expectations of more interest rate cuts this week from Australia, Britain and the euro zone following last week's reductions from China, India, Japan and the United States, among others, has at the least slowed the panicked selling of risky assets that dominated most of October.

"Some weeks back, what were needed were coordinated global policy responses. Though there have been a few wobbles and maybe less coordination than ideal, it is difficult not to look back and consider that we are moving in the right direction," said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale in Hong Kong.

"For Asia, a renewed focus on the real economy cannot ignore the fact of slower global growth and resultant slower external demand," he said in a note.

The scramble to exit equities, commodities and local currency emerging market bonds in October had poured money into yen, U.S. Treasuries and the U.S. dollar, which had its largest monthly in gain in 17 years. These trends were not expected to reverse any time soon, but investors were taking advantage of the relative calm in markets to balance their portfolios.

The MSCI index of stocks in the Asia-Pacific region outside Japan .MIAPJ0000PUS rose 5.9 percent, up for a fifth consecutive session after having dropped 24.6 percent in October for its biggest monthly decline in the gauge's 20-year history.

Hong Kong's Hang Seng index .HSI climbed 5.3 percent, with bank shares posting solid gains after a Chinese central bank official reportedly said Beijing had abandoned its lending caps in a move that could make funneling money to small firms much easier.

The benchmark KOSPI in South Korea .KS11 gained 1.4 percent, boosted by details on a $11 billion government fiscal stimulus package that officials said would add a full percentage point to total output.

Australian stocks rose 5.1 percent, while Japanese markets were closed for a holiday.

RATE CUTS ALL AROUND

The parade of rate cuts from Beijing to Washington and massive amounts of U.S. dollar liquidity flooding the financial system have pulled lower lending rates between banks and improved investor sentiment, despite the strong potential for higher unemployment and softer consumer spending around the world.

JPMorgan asset allocation strategists expect gross domestic product in developed economies in the current and next quarters to shrink by the most since 1974. They recommended keeping bets on short-dated government bonds, and against the industrial, materials and energy sectors in equities.

Growth in Korean exports was at a 13-month low in October, hurt by crimped demand from both developed and emerging markets, while a measure of China's factory segment fell to a record low. The reports underscored the region's biggest vulnerability to the global slowdown: exports.

Crude prices climbed, with dealers taking cues from equities and the U.S. dollar. U.S. light crude for December delivery rose $1.11 to $68.92 a barrel.

Gold in the spot market was trading at $733.00 an ounce, up $8.95 from New York's notional close on Friday.

"It appears the systemic risk that supported gold through the heat of the credit crisis has been alleviated somewhat by the action of the world's central bankers, however, it has not totally vanished," UBS analyst Glyn Lawcock said in a report on Monday.

Easing in fear-driven trades pushed up the U.S. dollar against the yen and pulled it lower against the euro, with investors bracing for another round of interest rate cuts this week by the world's major central banks.

The dollar was at 99.43 yen, up from around 98.45 yen late in New York on Friday. The euro was at $1.2880, up from $1.2730 on Friday.

U.S. Treasury prices were mostly unchanged, though the benchmark 10-year note rose 4/32, pushing the yield down to 3.96 percent from 3.97 percent on Friday.

In the last week, the difference of the 10-year yield over the 2-year yield, also called the yield curve, has increased, especially after the Federal Reserve left the door open for more rate cuts to stabilize the economy.

(Additional reporting by James Regan in SYDNEY; Editing by Lincoln Feast)