Asia stocks rally, led by Chinese banks

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Asian stocks rose on Monday, snapping a six-day losing streak on optimism that China's banking sector has thrived despite market turmoil and bargain-hunting investors picked over battered shares.

However, fears that stagflation would hit company earnings and continue to depress consumer spending kept enthusiasm under wraps as European, Asian and U.S. equity markets all lingered in bear market territory.

European stocks were expected to open modestly higher thanks to a dip in oil prices, according to financial bookmakers in London. Worries about the European banking sector could limit gains after a Swiss newspaper reported on Sunday authorities could require UBS and Credit Suisse to set aside an additional 70 billion Swiss francs ($68.29 billion) in capital.

Oil prices slipped under $144 a barrel as the U.S. dollar rose while corn and soybean prices slid, but with regional stocks persistently down more than 20 percent from cycle highs — the common definition of a bear market — investors sought safety, stability and perhaps some cheap stocks.

"Investors shouldn't feel too gloomy about the stock market since most shares have become cheaper after recent losses," said Michael On, managing director of Beyond Asset Management in Taipei.

CHINA LEADS

Greater China markets led the region higher. The Shanghai composite jumped 4.2 percent on hopes the index had found a near-term floor, bouncing from a 17-month low plumbed last week.

Hong Kong's Hang Seng index gained 1.5 percent, helped by banks such as China Merchants Bank, which forecast on Friday its first-half net profit more than doubled, following a positive earnings comment from Industrial & Commercial Bank of China on Thursday

Japan's Nikkei share average finished 0.9 percent higher, breaking the longest losing streak since 1954. The biggest percentage gainers on the index on Monday had underperformed the Nikkei by up to four percentage points last month.

Shares in the Asia-Pacific region traded outside of Japan edged up 0.3 percent, according to an MSCI index Earlier the index touched its lowest intraday level since August 2007 when trouble in the U.S. subprime mortgage market turned into a full-blown credit crisis.

The pan-Asia index rose for the first time since June 26, up 1 percent, but is still down close to 16 percent this year.

With U.S. aluminium company Alcoa Inc and General Electric kicking off the earnings season this week, worries about falling profits weighed.

"What could be the big negative surprise the market has not yet fully taken into account? We think it might come from the corporate sector," said Garry Evans, Asia-Pacific equity strategist with HSBC in Hong Kong.

"The risk of an earnings recession comes looming into view. We think, therefore, that the bear market still has quite a long way to go to work itself out," Evans said in a note.

FX INTERVENTION FUTILE?

The Korean won rose sharply after finance officials starkly warned of stern measures to boost the currency and try to curb inflation.

That attempt was the latest by policymakers in the region to put a floor under their currencies to relieve upward price pressures that have been plaguing their countries.

However, some analysts believe the toxic combination of feeble growth and high inflation known as stagflation, is too large of a force to beat.

"The best they can hope for, in our view, is to engineer an orderly decline through a smoothing operation. And maybe Vietnam cannot even achieve that," said Stewart Newnham, currency strategist with Morgan Stanley in Hong Kong.

The U.S. dollar was down 0.6 percent against the won at 1042.60.

The euro fell 0.3 percent against the dollar to $1.5640 ahead of two speeches this week from Federal Reserve Chairman Ben Bernanke, which could reignite expectations for interest rate rises to curb inflation.

Against the yen, the dollar climbed to 107.27 yen up 0.5 percent.

Crude prices fell to $143.75 a barrel although uncertainty was rife after Iran, the world's fourth largest oil exporter, reasserted its right to pursue uranium enrichment. Last week, oil rose to a record high of $145.85 and has risen about 50 percent so far this year.