Asian stocks climb, Aussie recovers as markets digest uncertain election

By Lisa Twaronite and Nichola Saminather

TOKYO/SINGAPORE (Reuters) - Asian shares shrugged off early losses and edged higher on Monday, while pressure on the Australian dollar eased after Moody's played down political uncertainties that could threaten the country's credit ratings after weekend elections.

Activity across much of the region was subdued ahead of the U.S. Independence Day holiday, when financial and commodity markets will be closed.

European markets are poised for a mixed start with financial spreadbetter CMC Markets expecting Britain's FTSE 100 (FTSE) to open up 0.3 percent, Germany's DAX (GDAXI) to be little changed and France's CAC 40 (FCHI) to start the day 0.1 percent lower.

Investors also continued to take stock of the potential financial market and economic fallout from the Brexit vote after days of volatile trade that followed in its wake.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) added 0.8 percent, after Wall Street logged its fourth straight day of gains on Friday. Japan's Nikkei stock index (N225) closed up 0.6 percent.

China's CSI 300 index <.CSI300> rose 1.8 percent and the Shanghai Composite <.SSEC> advanced 2 percent. Hong Kong's Hang Seng (HSI) gained 1.6 percent.

While Australian politics usually have a muted impact on broader markets, the vote count so far has produced no clear winner, suggesting possible policy paralysis ahead which could pose a threat to the country's triple A credit rating.

"In Asian markets the main focus was on the Australian election which saw Prime Minister Malcom Turnbull's decision to call an election backfire spectacularly after the vote failed to produce a clear winner as Australia became the latest country to fall victim to dysfunctional politics," Michael Hewson, chief market analyst at CMC Markets in London, wrote in a note.

"The big risk now is that any delay in forming a new government could well undermine the Australian economy as well as the Australian dollar, at a time when sentiment is already fragile," he added.

But both Australian shares and the country's currency managed to turn higher after Moody's Investors Service said short-lived political uncertainty would have limited implications for the country's coveted triple-A credit rating.

Australian shares (AXJO) clawed their way out of negative territory to close up 0.7 percent.

The Australian dollar rose as high as $0.7510, the highest since its post-Brexit peak reached on June 24, after earlier falling as low as $0.7410before settling at $0.7507 .

The Reserve Bank of Australia (RBA) will hold its July board meeting on Tuesday, and almost all 37 economists polled by Reuters last week expected it to keep the cash rate unchanged at a record low 1.75 percent.

But some analysts say it might hint at future policy easing in the wake of Brexit, which roiled financial markets and raised fears about a further blow to fragile global growth.

The British pound was little changed at $1.3279 , nursing its losses after its 11 percent plunge to a 31-year trough of $1.3122 a week ago following last month's Brexit stunner.

The U.S. dollar took a breather ahead of the holiday, with the dollar index steady at 95.661 (DXY), but it remained pressured by a fall in U.S. Treasury yields on Friday that saw the benchmark 10-year (US10YT=RR) yield briefly touch a four-year nadir.

Volatile trade around the world has pressured bond yields. Early on Monday, the yield on the 5-year Japanese government bond fell to a record low of minus 0.375 percent, and the 20-year JGB yield fell to a record low of 0.035 percent before climbing back up to 0.045.

"It seems the recent declines in JGB yields are led more by foreign market movements rather than domestic factors," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley (NYSE:MS) Securities.

"Globally, positive yields are disappearing, which has investors concerned, so they rush to purchase government bonds with positive yields," she said.

The euro inched slightly lower to $1.1131 and was down slightly against its Japanese counterpart at 114.27 yen (EURJPY=R). The dollar rose 0.2 percent to 102.65 yen .

Crude oil prices extended gains on Monday following Friday's surge, following comments by the Saudi energy minister that the oil market is heading towards balance, despite signs of slowing demand in Asia.

Brent crude (LCOc1) added 0.7 percent $50.70 a barrel, while U.S. crude (CLc1) also rose 0.7 percent to $49.31. There will be no U.S. crude settlement on Monday due to the holiday.

Spot gold added 0.8 percent to $1,353.00 an ounce after gaining 1.5 percent on Friday and about 9 percent in June.

Silver surged 3.9 percent to $20.50 an ounce, breaking the $20-dollar level for the first time in nearly two years.