Asian shares rose and the euro extended gains as solid US corporate earnings and surprisingly strong euro zone data offset growing scepticism that stress tests on European banks were not strict enough.
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.
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 gained 0.2 per cent in early Asian trade, after rising on Friday as the bank tests showed no nasty surprises and on strong euro zone data, including a record jump in German business sentiment in July.
"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 rose 0.4 per cent, after rising 1.5 per cent on Friday on optimism over US company earnings.
Japan's Nikkei outperformed its regional peers, gaining 1.2 per cent and extending a 2.3 per cent rally in the previous session. Investors were shifting to focus to a slew of corporate results from major Japanese exporters such as Sony and Honda later in the week this week.
South Korea's benchmark KOSPI firmed 0.4 per cent following stronger-than-expected seocnd-quarter growth data while Hong Kong's Hang Seng rose 0.3 per cent.
US stocks rose about 1 per cent on Friday as GE shares jumped after the conglomerate increased its quarterly dividend by 20 per cent, the latest in a string of bullish news from big US multinationals which have helped ease concerns that the global economic recovery may be stalling.
While most economists rule out a slide back into recession, data shows US growth is definitely cooling, even as parts of Europe show sparks of life and Asian economies roar ahead.
Economists polled by Reuters think US growth slowed to a 2.5 per cent annual rate in the second quarter, down from 2.7 per cent in the first quarter. The GDP data, to be released on Friday, is also expected to show much of the US growth continued to be reliant on government spending amid weakening consumer confidence.
Euro up but doubts remain
Reflecting investor caution towards risk taking amid doubts about the credibility of the stress tests, the Australian and New Zealand dollars steadied after rallying on Friday. Investors are awaiting to see how European markets will react to the test results, which were announced after they had closed, although the outcome was unlikely to provide players with a clear sense of direction.
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 per cent.
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 $1.60 to $US1190.65 an ounce while crude oil futures inched above $US79 a barrel as Tropical Storm Bonnie dissipated into a low-pressure system and avoided oil and gas operations in the eastern Gulf of Mexico.
Reuters