Asian stocks rose on Monday on strong corporate earnings and shrugged off news that Chinese manufacturing shrank in July amid investor hopes that the world's fastest growing major economy will expand strongly.
European shares were expected to track Asia's gains and a late recovery on Wall Street on Friday.
Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> were seen opening up to 0.9 percent higher according to financial spreadbetters. <.EU>
HSBC <0005.HK>, Europe's biggest bank, is expected to release first-half results later in the day.
The high-yielding Australian dollar rose, helped by the rise in stocks. The U.S. dollar hit a three-month low against a basket of currencies, hurt by persistent worries that the U.S. economy's recovery is losing steam.
HSBC's China Purchasing Managers' Index fell below the boom-bust line of 50 in July for the first time since the depths of the global downturn in March 2009. The index dropped to 49.4 from 50.4 in June.
A figure above 50 denotes expansion. HSBC played down the drop, which coincides with signs of weakness in the United States.
Although the index pointed to a month-on-month contraction in manufacturing, it was still consistent with annual growth in Chinese industrial production of 11-13 percent, HSBC said.
There is no need to panic because this is just a slowdown, not a meltdown, Qu Hongbin, chief economist for China at HSBC, said in a statement.
Financial markets took the drop in the PMI in stride.
Asian stocks extended the morning's rise with the MSCI Asia ex-Japan index <.MIAPJ0000PUS> up 1.6 percent as tech and consumer discretionary led gains.
Investors were relieved that a companion PMI, produced for China's National Bureau of Statistics and released on Sunday, held firmly above 50.
Shares of Honda Motor <7267.T> jumped more than 4 percent after the company reported its best quarterly profit in 2- years and raised its forecasts despite the sharp rise in the yen.
Market players will continue to focus on macroeconomic factors this week with PMIs across Europe and U.S. manufacturing data expected later on Monday and the closely watched U.S. non-farm payrolls numbers scheduled for Friday.
The dollar has been hobbled by worries over the U.S. economy after a series of U.S. economic data in the past month undershot market expectations, and its slide has been exacerbated by some bearish signals on technical charts.
The conflict between strong earnings and lackluster economic news has held U.S. stocks in a tight range throughout July.
Over two-thirds of the S&P 500 <.SPX> constituents have reported earnings with about 80 percent of those beating analyst forecasts, according to data from Thomson Reuters Starmine.
Investors will look for signs that strong corporate earnings in the United States translate into a pick-up in hiring.
Sluggish jobs growth, marked by a 9.5 percent unemployment rate, is the biggest obstacle to the economy's recovery from the most brutal recession since the 1930s.
The dollar <.DXY> hit a three-month low against a basket of currencies at $81.393 and was seen stuck in a downtrend due to concerns that the U.S. economy's recovery was losing momentum.
The dollar stood near 86.62 yen, close to an eight-month low of 85.95 yen hit on Friday after U.S. gross domestic product slowed more than expected in the second quarter.
The greenback is within striking distance of a 14-year high of around 85 yen reached in November, fueling speculation that Japanese authorities could conduct intervention to protect their exporters from a rising currency.
Excessive foreign exchange moves are undesirable because of the impact they have on the economy and financial markets, Japan's Finance Minister Yoshihiko Noda told reporters.
The Australian dollar hit three-month highs on Monday with the New Zealand dollar in tow, as a soft U.S. dollar, higher Asian equities and light short-covering activity all helped to lift the pair.
(Editing by Jan Dahinten)