Asian shares and the euro rose on Tuesday as slightly better-than-expected Chinese economic growth data soothed investor worries that the euro zone debt crisis is dragging down the global economy.
Copper and other industrial metals, and commodity-linked currencies such as the Australian dollar, also advanced on signs European woes have not derailed the growth trend in the world's second largest economy, a giant importer of commodities.
China's gross domestic product grew at an annual rate of 8.9 percent in the fourth quarter, its weakest in 2- years and slowing from 9.1 percent in the previous quarter, but it beat expectations for a 8.7 percent rise.
The slowdown is quite modest, and the overall situation of the Chinese economy is stable, said Hua Zhongwei, analyst with Huachuang Securities in Beijing. According to our field studies, demand for heavy equipment and machinery is recovering, and that is a very good sign for the economy.
Materials <.MIAPJMT00PUS> and energy <.MIAPJEN00PUS> sectors led a 2 percent climb in the MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS>. By region, Shanghai shares <.SSEC> rose more than 3 percent and Hong Kong <.HSI> shares added 2.2 percent, while shares in resource reliant Australia hit a five-week high.
Japan's Nikkei average <.N225> ended up 1 percent. <.T>
European shares were set to open higher, with financial spreadbetters forecasting Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> would open up around 0.4-0.7 percent.
China GDP and exports: http://link.reuters.com/zeq95s
Package of ECB graphics: http://link.reuters.com/neg32s
Euro-zone sovereign ratings: http://r.reuters.com/maf75s
Global government yields: http://link.reuters.com/ser95s
The euro rose 0.5 percent to $1.2730, moving away from its lowest since late August 2010 of $1.2624 hit on Friday. It also extended gains against the yen to 97.60 yen, having hit an 11-year low near 97 yen on Monday.
The Australian dollar extended its climb to a two-month high near $1.04. London copper rose 1.7 percent to around $8,230 a tonne while Brent crude oil gained above $112 a barrel.
A recovery in risk-taking sentiment warmed Asian credit markets, tightening spreads on the iTraxx Asia ex-Japan investment grade index by several basis points.
Recovery in risk appetite and the euro lifted spot gold up nearly 1 percent to around $1,660 an ounce.
Market focus had turned to economic data, shrugging off the latest move by Standard & Poor's to cut a top-notch credit rating on the euro zone's bailout fund, following mass downgrades late last week that stripped France and Austria of their prime AAA ratings.
Investor sentiment remained pressured by persistent concerns about Europe's ability to resolve its two-year-old debt crisis, with Greece struggling to break a deadlock on its debt-swap talks, keeping intact fears of a default.
The China data is good news as it shows the economy hasn't slowed as much as feared by some, said Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong.
But we still have to watch out for risks, including the recession in Europe and China's domestic housing industry correction.
For Europe, market attention will likely switch to the latest ZEW survey due later on Tuesday on the health of the giant German economy.
A recovery in S&P 500 index futures, which began in mid-December as the euro eased against the dollar, shows that positive correlation between EUR/USD and equities is starting to erode, RBC Capital Markets said in a report.
The key take-away here is that the 'risk on/risk off' dynamic may be starting to have less of an influence on markets, with pure 'fundamentals' becoming more relevant as the euro zone crisis is now infecting core markets, it said.
In the first test of investor appetite for French debt since the S&P rating downgrade, yields on French treasury bills eased marginally on Monday.
The euro zone faces further tests later in the week when
France and Spain offer longer-dated debts.
The cost of insuring Italian, Spanish and other euro zone government debt against default rose on the S&P ratings cuts, while a flight to safety pushed shorter-dated British government bond yields down on Monday.
(Additional reporting by Jane Lee in Kuala Lumpur; Editing by Alex Richardson)