Asian shares gained on Tuesday, taking heart from a rally on Wall Street spurred by strong U.S. job data last week, while the U.S. dollar held near a three-year high against a basket of currencies.
But Chinese shares underperformed on concerns over Beijing's credit reform drive to rebalance the economy and as unexpectedly high inflation data shut out any near-term possibility of monetary support for economic growth.
European shares were expected to open higher, however, with and Germany's DAX and Britain's FTSE 100 seen trading up around 0.4 per cent.
In Asia, Japan's Nikkei share average rose 2.3 per cent, looking set to hit a six-week closing high, while MSCI's Asia-Pacific ex-Japan index rose 1.2 per cent.
The rally came after U.S. S&P 500 index gained 0.5 per cent, to 1,640.46, while the index's futures contract gained another 0.4 per cent in Asian trade on Tuesday.
After U.S. close on Monday, Dow component Alcoa Inc, the largest U.S. aluminium producer, reported a larger-than-expected quarterly profit, excluding one-time items such as restructuring costs and legal expenses, kicking off the earning season.
"Market focus is going to be the U.S. reporting season, and the Alcoa result was modestly better than anticipated," said Martin Lakos, division director at Macquarie Private Wealth in Sydney.
China credit worries
Chinese shares were softer, however, with the CSI300 of the leading Shanghai and Shenzhen A-share listings little changed after a 2.8 per cent fall the previous day.
China's leadership laid out plans to ensure banks would support an economic rebalancing to more efficient, high-end manufacturing from ageing industries facing overcapacity and extravagant investment funded by cheap debt.
Data showed on Tuesday China's annual consumer inflation accelerated more than expected in June as food costs soared, limiting any near-term room for the People's Bank of China to loosen policy to underpin the slowing economy.
"I don't think anybody's expecting Beijing to loosen (policy), the key here is more efficient credit allocation and for that reason, people will be watching out for the money supply and loan growth data this time round," said Kelvin Wong, Julius Baer's China-Hong Kong equity analyst.
That data is expected by July 15. Beijing is due to release June trade numbers on Wednesday, and second-quarter GDP growth is due on Monday, as are monthly urban investment, industrial output and retail sales figures.
The dollar index, which measures the value of the greenback versus a basket of six major currencies, stood flat at 84.181, not far from Monday's high of 84.588, its strongest since July 2010.
"The policy divergences between the Fed and the developed countries like...UK and Japan are likely to widen over time and that will continue to favour dollar strength," said Sim Moh Siong, FX strategist for Bank of Singapore.
The dollar fetched 101.24 yen, having hit five-week high of 101.54 yen on Monday while the euro traded at $1.2886, not far from seven-week low of $1.2806 set on Friday.
Expectations that a stronger U.S. economy will give the Fed room to begin tapering its bond-buying, most likely in September, have sparked a nearly 5 per cent rally in the dollar and some 50-basis point rise in the benchmark 10-year U.S. bond yield since mid-June.
The yield on U.S. 10-year notes had risen as high as 2.755 per cent on Monday, though bargain-hunting pushed it back to 2.653 per cent.
Oil futures dipped, slipping from Monday's multi-month highs as news that a major Libyan oilfield and an Iraqi pipeline were returning to service eased concerns about global oil supplies sparked by unrest in Egypt.
Gold extended a rebound to a second day after breaking through a key technical level and as China inflation data boosted its appeal as a hedge against rising prices in the world's second-biggest buyer of the metal.
Spot gold rose 1.8 per cent to $1,259.26 an ounce by 0545 GMT.
Copyright: Thomson Reuters 2013