By Saikat Chatterjee
HONG KONG (Reuters) - Asian stocks bounced from their lows on Monday and the Australian dollar pared early losses as weak China factory activity reinforced views that Beijing will roll out fresh support measures soon for the world's second-largest economy.
The HSBC/Markit Purchasing Managers' Index (PMI) showed factory activity in China contracted at its fastest rate in a year in April as demand faltered and deflationary pressures persisted.
"The PMI indicates that more stimulus measures may be required to ensure the economy doesn't slow from the 7 percent annual growth rate seen in Q1," said Annabel Fiddes, an economist at Markit.
UBS strategists expect the government to speed up infrastructure investment with the help of policy banks and cut benchmark interest rates again in the next couple of months.
Similar factory surveys on Friday showed weak activity in Japan and South Korea as well, adding urgency to calls for more state stimulus in all three economies which could offer more fuel for rallying stock markets.
"Valuations are still attractive and this is a liquidity-fuelled rally so any broad pullbacks are going to be viewed as a buying opportunity by investors," said Grace Tam, a markets strategist at JP Morgan Asset Management in Hong Kong.
Shares in Shanghai fell after the PMI survey but quickly clawed back losses and were up nearly 1 percent by late morning as investors bet on more policy easing. China trade data is due out on Friday.
The bounce in China's markets pulled the MSCI's broadest index of Asia-Pacific shares outside Japan up 0.2 percent. Australian stocks were slightly higher and South Korea's main index managed to inch up 0.3 percent.
Trading was thinned by the absence of Japanese markets, which are on holiday from Monday to Wednesday.
The Australian dollar, often used as a proxy for China risk, fell 20 ticks before recovering to trade at 0.7825.
Investors were cautious ahead of a number of events this week, including the UK election on Thursday. The latest polls show neither of the major parties is likely to win a clear majority of seats.
U.S. non-farm payrolls on Friday, meanwhile, could signal whether the world's largest economy is faring any better in the second quarter after growth nearly stalled early in the year.
On Wall Street, the Dow had ended on Friday up 1.03 percent, while the S&P 500 gained 1.09 percent and the Nasdaq 1.29 percent.
BOND SIGNALS
Investors will also be watching bond markets closely after a sharp and sudden rise in developed market yields last week, led by the eurozone, which suggested the long bull run in bonds might finally have run out of steam.
In the United States, a recent bounce in commodity prices and caution ahead of the U.S. jobs report has prompted some investors to reduce their holdings, sending 10-year Treasury yields to a seven-week high of 2.11 percent.
In the eurozone, tentative signs of an economic pick up in the region have sent German 10-year Bund yields up nearly 21 basis points for the week, the biggest such move since June 2013.
"We think bond markets are already priced for very gloomy medium-term economic scenarios of low growth and little inflation pressure for years - almost 'as good as it gets' for bond markets," said Peter Schaffrik, chief European macro strategist at RBC Capital Markets.
"We think the risks are skewed heavily to the upside and expect higher yields over the course of the year against a more positive economic backdrop in the US and Europe."
Higher eurozone yields have enhanced the appeal of the single currency, with the euro hitting a nine-week high of $1.1289 on Friday. There it ran into profit taking and was hovering around $1.1194 in Asia on Monday.
The greenback held above two-month lows against a trade-weighted basket of currencies at 95.25. It has fallen more than 5 percent since April 13 as investors took profits.
The Australian dollar remained on the defensive at $0.7829 amid speculation the Reserve Bank of Australia (RBA) will cut interest rates to a fresh record low of 2.0 percent at a policy meeting on Tuesday.
In commodity markets, oil prices had eased off 2015 highs after Iraq said its crude exports hit a record in April, keeping Middle East production well above demand.
Brent crude was quoted 6 cents firmer at $66.32 a barrel, while U.S. crude eased 3 cents to $59.12.
(Additional reporting by Wayne Cole in SYDNEY; Editing by Kim Coghill)
