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By Lisa Twaronite
TOKYO (Reuters) - Japanese stocks led a rally in Asia on Monday, after solid U.S. data and earnings calmed tumult in global financial markets and reassured investors worried about the health of the world economy.
The Thomson Reuters/University of Michigan index of consumer sentiment was surprisingly strong in early October, rising to more than a seven-year high. Other data also showed new housing starts rose more than expected last month, suggesting U.S. economic growth was solid.
The upbeat U.S. data has brought some calm to markets after a week of turbulence as signs of softening global growth roiled investors and sent volatility spiking.
MSCI's broadest index of Asia-Pacific shares outside Japan surged 1.3 percent, while Japan's Nikkei stock average jumped about 3.7 percent, posting its biggest daily rise since June last year and retaking some of the 5 percent it shed in the previous week.
European markets were expected to open higher too, with financial spreadbetters predicting Britain's FTSE 100 and Germany's DAX to each open up 0.4 percent, and France's CAC 40 to open flat.
Shares in Shanghai added 0.5 percent, after sources said on Friday that China's central bank is set to inject about 200 billion yuan(20.27 billion pounds) worth of three-month loans into five or six medium-sized listed banks to keep liquidity ample and support the slowing Chinese economy.
Data on Tuesday is expected to show that China's economy likely grew at its weakest pace in more than five years in the third quarter as a property downturn weighed on demand, according to analysts polled by Reuters, raising the chances of more aggressive policy steps.
"We take this (injection) as a message from the Chinese government that they're basically changing the priority from anti-corruption to the economy again, which brings some comfort to the market," said Kyoya Okazawa, head of global equities at BNP Paribas in Tokyo.
Still, Okazawa said, much of the rise in Asian shares was due to funds reducing their downside hedges, so he called Monday's broad gains a "mostly technical rebound."
Tokyo shares in particular were underpinned by expectations that Japan's $1.2 trillion (745.1 billion pounds) Government Pension Investment Fund, the world's largest public pension fund, will likely raise its allocation for domestic stocks to about 25 percent, according to people familiar with the process.
On Wall Street, all major stock indexes climbed more than 1 percent on Friday, though the S&P 500 posted its fourth straight weekly decline, its longest streak in more than three years.
U.S. earnings will remain in the spotlight this week, with results due from 128 S&P 500 companies, including six Dow components.
Out of the 81 S&P 500 component companies that have already reported third-quarter results, 64.2 percent have beaten expectations, a rate slightly below the average over the past four quarters but better than the past 20 years.
But some strategists remain wary as the negative factors which dragged down global shares last week have not completely evaporated.
"With Halloween just around the corner, the market was spooked by 'ghosts' and these ghosts will probably stick around longer," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Centre. "The ghosts are European economic concerns, worries on what could happen after the Fed ends tapering, and fears about Ebola."
Asian investors are also paying attention to developments in Hong Kong, where pro-democracy protests entered their fourth week and demonstrators appeared increasingly willing to confront police.
U.S. Treasuries posted their second straight day of declines on Friday, and their rising yields added to the dollar's appeal.
The yield on benchmark 10-year notes stood at 2.221 percent in Asian trade, up from Friday's U.S. close of 2.199 percent and well away from 17-month lows below 2 percent plumbed last week.
Speculators boosted their bullish bets on the dollar in the week ended Oct. 14 to their largest since late May last year, still showing optimism for U.S. economic prospects, data from the Commodity Futures Trading Commission showed on Friday.
The value of the dollar's net long position increased to $43.04 billion from $40.91 billion the previous week. Net dollar-long positions notched their fourth straight week of rises, and totalled at least $30 billion for the ninth straight week.
The euro was slightly lower at $1.2754, while the dollar added about 0.4 percent against the yen to 107.29 yen.
The yen's drop to a six-year low against the dollar of 110.09 on Oct. 1 followed a rapid decline of 8 percent over three months, and sparked fears at some Japanese companies. Nearly half of Japanese firms think the government should start defending the yen at this month's dollar high of 110, according to a Reuters survey released on Monday.
In commodities trading, Brent crude rose about 0.1 percent on the day to $86.22 a barrel, bouncing from last week's nearly four-year lows as investors bought back into a market they said was oversold. U.S. crude rose about 0.5 percent to $83.11 after logging its third weekly decline.
Spot gold inched down about 0.1 percent to $1,236.06 an ounce, after marking its second straight weekly gain.
(Additional reporting by Ayai Tomisawa in Tokyo; Editing by Shri Navaratnam)