The euro edged up and Asian shares rose on Monday as solid U.S. corporate earnings and surprisingly strong euro zone data offset growing skepticism that stress tests on European banks were not strict enough.
The upbeat sentiment was expected to carry over to European markets, with Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> seen opening up to 1 percent higher in their first reaction to the bank test results, which were released after European markets closed on Friday.
Only seven of 91 banks -- five small Spanish banks, Germany's state-rescued Hypo Real Estate and Greece's ATEbank -- failed the tests, for an overall capital shortfall of 3.5 billion euros ($4.5 billion).
The shortfall was much smaller than the 30-100 billion euros predicted by markets, although many European banks have already raised capital during the financial crisis.
The euro inched up 0.2 percent against the U.S. dollar in Asian trade to around $1.2944, before paring some of its gains.
It had risen by a similar margin on Friday as the bank tests revealed no nasty surprises. The single currency was also buoyed by strong European data, including a record jump in German business sentiment in July and a stronger-than-expected surge in the British economy.
With the results of the stress tests, which had been the market's big focus, out in the open, downward factors seem to have run their course for now, even though there's criticism that those tests might have been too easy, said Hiroichi Nishi, general manager of equity marketing at Nikko Cordial Securities.
The market will likely rise initially and then move narrowly awaiting reaction in Europe with market players keeping an eye on currency moves.
Asian stocks outside Japan <.MIAPJ0000PUS> rose 0.5 percent, after advancing 1.5 percent on Friday on optimism over U.S. company earnings.
Japan's Nikkei <.N225> outperformed, unofficially closing 0.8 percent higher and extending a 2.3 percent rally in the previous session. Investors were shifting to focus to a slew of corporate results from major Japanese exporters such as Sony <6758.T> and Honda <7267.T> later in the week this week.
South Korea's benchmark KOSPI <.KS11> firmed 0.6 percent following stronger-than-expected second-quarter growth data while Hong Kong's Hang Seng <.HSI> rose 0.2 percent.
U.S. stocks rose about 1 percent on Friday as GE shares jumped after the conglomerate increased its quarterly dividend by 20 percent, the latest in a string of bullish news from big U.S. multinationals which have helped ease concerns that the global economic recovery may be stalling. <.N>
While most economists rule out a slide back into recession, data shows U.S. growth is definitely cooling, even as parts of Europe show sparks of life and Asian economies roar ahead.
Economists polled by Reuters think U.S. growth slowed to a 2.5 percent annual rate in the second quarter, down from 2.7 percent in the first quarter. The GDP data, to be released on Friday, is also expected to show much of the U.S. growth continued to be reliant on government spending amid weakening consumer confidence.
Reflecting investor caution toward risk taking amid doubts about the credibility of the stress tests, the Australia dollar dipped and the New Zealand dollar steadied after rallying on Friday.
Banks were tested on how well they could withstand another recession in the next two years and some losses on their government bond holdings. They failed if their Tier 1 capital ratio dropped below 6 percent.
But analysts said the assessments were not tough enough and questions remained over the true health of the sector.
The tests did not assume a sovereign default and included haircuts on sovereign debt only for the component held on trading books, which represents a small majority of overall holdings, analysts at Credit Agricole CIB said in a note to clients.
Spot gold rose 0.3 percent to $1,192.75 an ounce while crude oil futures hovered near $79 a barrel as Tropical Storm Bonnie dissipated into a low-pressure system and avoided oil and gas operations in the eastern Gulf of Mexico.
(Additional reporting by Aiko Hayahi; Editing by Kim Coghill)