Most Asian stock markets fell on Monday on concerns about corporate profits and a still-uncertain outlook for the global economy, but Indian shares surged following the ruling coalition's sweeping election victory.
Hopes that Congress' victory will usher in a more stable government -- and with it more certainty on policy and reforms -- bolstered Indian financial markets, with the rupee rising to its highest against the dollar in over four months.
India's benchmark 30-share BSE index <.BSESN> surged more than 17 percent before trading was halted for the day, pulling the MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS> to a 1.2 percent gain, though most individual markets fell.
European shares fell as much as 1.1 percent in early trade, following the more cautious global trend.
Japanese government bond yields were range-bound while the yen extended gains after Moody's said on Monday it was raising local currency ratings on the debt but cutting its foreign currency credit rating.
Recent economic indicators show that the worsening of the economy appears to have stopped, but now we need to see signs of recovery or it'll be difficult for stocks to rise decisively, said Yoku Ihara, manager at the investment information department of Retela Crea Securities.
Investors are hoping that the global economy's freefall has bottomed out, though the timing and potential strength of a recovery are far from clear.
The MSCI index has surged 53 percent from its 2009 low on March 4 to its yearly high on May 11, but the global equity rally has shown signs of losing steam in recent days.
U.S. economic reports on Friday were comforting, showing April consumer prices unchanged and industrial output declining at a slower pace.
Confidence is improving among Japanese manufacturers, according to a Reuters monthly poll, while U.S. consumers in May were also were optimistic.
On the other hand, recent weak outlooks from Asian blue chips such as Panasonic <6752.T> and Sony <6758.T> and other signs of weakness in Europe are not inspiring confidence.
Data on Friday showed euro zone economies shrank far more than expected in the first quarter, with Germany posting its worst performance since reunification, though analysts note the first quarter may have marked the low point.
Most major stock indexes in Asia, including those in South Korea <.KS11> and Australia <.AXJO> fell more than 1 percent each on Monday.
Japan's Nikkei average <.N225> dropped 2.5 percent, with shares of exporters under pressure as the yen advanced.
Panasonic slumped 7.6 percent after forecasting a bigger-than-expected annual loss on Friday, while Australian mining shares such as BHP
Hong Kong <.HSI> recouped early losses and was little changed by mid-afternoon.
The clear exception was India, where election-fueled gains were so strong they triggered two trading halts at the country's stock exchange.
Prime Minister Manmohan Singh's alliance defied predictions of a tight election and was only about 11 seats short of an majority from the 543 seats at stake, according to election commission data, though the final count see tiny changes.
Government policy in India in past years has been hobbled by a series of unwieldy coalitions which have been unable or unwilling to take harsh economic decisions or push through needed reforms.
The rupee was at 48.31/32 against the dollar, 2.3 percent above Friday's close of 49.41/42. The partially convertible currency had risen earlier as high as 48.24, up 8.2 percent from a lifetime low of 52.20 in March and up 1 percent this year.
We believe the election verdict could be game changing for India, as it enhances the scope for significant medium- and longer-term reforms that will boost the sustainable growth, said Rajeev Malik, Singapore-based economist at Macquarie Securities.
This, combined with the ongoing improvements in the Indian economy, will be highly positive for the economic outlook, he said.
OIL UNDER PRESSURE
Still the growing caution elsewhere was seen as investors switch to assets that tend to benefit during volatile times.
The yen, up already on increased risk aversion, gained further on the Moody's statement, but analysts said the move just reflected a correction of the discrepancy in which local currency ratings on the country's debt was higher than for its foreign currency ratings.
Lowering the foreign currency bond rating is consistent with Japan's fiscal burden, which has grown due to the financial crisis. This downgrade is understandable, said Masamichi Adachi, senior economist at JPMorgan in Tokyo.
The yen strengthened to 94.80 per dollar from about 95.00 per dollar shortly before the statement and to 127.68 per euro from about 127.92 beforehand.
However, the 10-year JGB yield was broadly unchanged at 1.405 percent.
Riskier assets suffered, with oil slumping nearly 4 percent on Friday amid doubts about the strength of global demand for energy.
Global energy forecasters have recently downgraded their forecasts for global energy demand in 2009, with the International Energy Agency saying the decline in oil consumption in 2009 would be the steepest since 1981.
U.S. crude futures gained 49 cents to $56.83 a barrel on Monday.
Some investors also worried about inflation risks in months ahead as governments and central banks spend trillions of dollars to stimulate growth and prevent prices from dropping too much.
Gold held close to a six-week high of $933.65 an once hit on Friday, as investors sought a hedge against inflation.