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China output growth slows; European earnings mixed

China's industrial output rose less than expected last month, offering another reminder that the global economic recovery may not be as swift and strong as markets had hoped for.

Mounting evidence that the worst global slump in six decades may be abating has in recent weeks encouraged investors to make riskier bets again, driving the safe-haven dollar to four month lows on Wednesday.

Intel Corp Chief Executive Paul Otellini was the latest official to voice guarded optimism about the future, saying the second quarter has been so far slightly better than expected for the technology bellwether.

However, there were still plenty of warning signs that the road to full recovery would be long and bumpy. The latest came in the form of Wednesday's disappointing Chinese production data and mixed earnings reports from Europe, including a bigger then expected loss posted by Dutch financial group ING.

China's factory output rose 7.3% in April from a year earlier, below analysts' 8.3% forecast, while retail sales jumped 14.8%, exceeding analysts' expectations.

The numbers, combined with Tuesday's bigger-than-expected slump in exports and robust growth in capital spending, showed an economy revving up with the help of Beijing's massive $585 billion stimulus, but still held back by weak foreign markets.

“Policy stimulus is having an impact on domestic demand, but weak external demand is still dragging down overall growth,” said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong. “It is important ... to recognize that any recovery in China is not going to proceed in a straight line.”

In Japan, service sector sentiment improved for the fourth month running and central bank data showed that firms were less inclined to hoard cash, and funding strains appeared to be easing.

Analysts, however, pointed out that this in part reflected reduced capital spending, which boded ill for recovery prospects for the world's second-biggest economy.

While ING disappointed markets with a €793 million ($1.1 billion) first-quarter loss, Italy's Unicredit matched expectations with its profit and Spain's Telefonica Europe's largest integrated telecoms group, beat forecasts with a near-10% profit rise.

Markets also expect a US retail sales report to add to evidence that the crisis that roiled financial markets, destroyed millions of jobs and pushed the world economy into recession, may be abating.

Sales excluding autos are seen edging up 0.2% in April after a 0.9% fall in March.

Despite some caution, the underlying sense of optimism about the prospects for the world economy was evident in market action.

Stocks in Tokyo and the MSCI all-country world stock index gained 0.5%, oil hovered around $60 per barrel on expectations of rising demand, while safe-haven dollar and US and Japanese government bonds slipped.

The dollar was under additional pressure from concerns over ballooning fiscal deficits that a commentary in the Financial Times said threatened the US government's top credit rating.

Bank bailouts made up much of Washington's rescue bill and banks were keen to show that they would be able to build up a capital cushion prescribed by regulators without further government handouts.

After Bank of America sold $7.3 billion worth of shares in China Construction Bank, according to a source, US Bancorp and Bank of New York Mellon Corp joined the ranks of big US banks conducting stock sales.

European Union sources said the 27-nation bloc would conduct its own bank stress tests by September, although it would look at the whole sector, not individual institutions.

“It is more a highly aggregated stress test, which should show the degree of resilience of the overall EU banking sector,” a source familiar with EU finance ministers' deliberations said. (Reuters)