By Marc Jones
LONDON (Reuters) - Signs of improving U.S. economic growth helped ease markets into holiday mode on Monday, though a credit squeeze in China took the edge off gains.
Volumes were very light, with Europe gearing up for Christmas and Tokyo already on holiday. European markets saw some last-minute festive shopping, as London's FTSE (.FTSE) and Frankfurt's Dax (.GDAXI) started 0.4 percent higher, with Paris's CAC 40 (.FCHI) up a more modest 0.1 percent.
Sentiment was underpinned by upbeat U.S. GDP data and the resilience of stocks to the Federal Reserve's decision to start scaling back its bond-buying stimulus.
"Growth is picking up," International Monetary Fund head Christine Lagarde said on NBC's 'Meet the Press'. "And unemployment is going down. So all of that gives us a much stronger outlook for 2014, which brings us to raising our (U.S.) forecast."
But early relief in Asia at a dip in China's benchmark short-term money rates quickly evaporated when they swung higher again, reaching a near six-month high of 9.8 percent at one stage.
Rapid credit growth in the world's second-biggest economy has worried Chinese authorities, who fear rising debt levels are fuelling asset bubbles.
The People's Bank of China (PBOC) injected more than 300 billion yuan into the interbank market on Friday in response to rising rates, but hinted that banks had work to do if they wanted to avoid a cash crunch.
"The PBOC appeared to stress that cash reserves are abundant in comparison to previous years, but the market has expanded sharply in recent years and demand in the interbank market has far exceeded the previous years' levels," said a trader at a major state-owned commercial bank in Shanghai.
The combination of the Fed tapering its bond-buying support and tighter China interest rates could weigh on emerging market currencies and assets, as it did back in June.
The Indonesian, Malaysian and Thai currencies all came under pressure last week and even the Korean won lost a little of its strength. The Thai baht, which also has domestic political troubles to contend with, hit its lowest since early 2010 on Monday.
Having already fallen around 8 percent in the last two weeks, stocks in Shanghai managed to bounce 0.4 percent (.SSEC), lessening the fallout across the region.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> firmed 0.4 percent as South Korea's main index (.KS11) and Aussie stocks (.AXJO) added 0.7 and 0.5 percent.
ITALY IN FOCUS
Italy was in focus in the euro zone after getting a fresh warning from the European Central Bank on Sunday that it needed to keep its public finances in check.
Milan's main stock market was struggling to stay in positive territory in early trading and its government bonds were vying with Spain to be the region's weakest performers.
Weak consumer data also hit sentiment ahead of a year-end news conference from Prime Minister Enrico Letta.
"Italy is suffering from a dearth of growth but for me it still seems to be a solid member of the euro zone," said Neil Williams chief economist at fund manager Hermes.
"My concern for next year for the euro zone is not so much the periphery, but what happens with the bill-payers."
In the currency market, the dollar was idling just below 104 yen after hitting a fresh 5-year high at 104.64 last week. Dealers cited option barriers at 104.75 and 105.00 as the next target for bulls.
The euro was a shade firmer at $1.3680, but well short of last week's $1.3811 peak.
Some of the heat has been taken out of the single currency in recent day as banks have stocked up for the sensitive year-end period with extra ECB funding.
It was only briefly troubled on Friday when Standard & Poor's cut its supranational long-term rating on the European Union to AA-plus from AAA, citing rising tensions on budget negotiations.
In commodity markets, gold has been getting less precious by the day due to the winding back of U.S. stimulus and a general lack of global inflationary pressure.
The metal was pinned just above $1,200 on Monday after carving out a six-month low of $1,187.80 last week. If prices stay at that level the metal would have shed 28 percent this year, the largest annual loss in 32 years.
In contrast, oil prices have been supported by a positive outlook for fuel demand in the United States and reduced Libyan supply. Brent crude was a fraction lower on Monday at $111.44 a barrel after gains of almost 3 percent last week.
U.S. oil futures dipped 33 cents to $98.96.
(Additional reporting by Wayne Cole in Sydney; Editing by John Stonestreet)