TOKYO (Reuters) - Asian shares pared early gains on Friday after China's first-quarter growth was slower than expected, clouding the outlook for demand, but a better-than-expected outcome for Italy's sovereign debt sale helped investors retain some risk appetite.
The Asian markets shrugged off a rocket launch by North Korea before they opened. South Korea's Defense Ministry said the rocket exploded in mid-air in the initial minutes of flight, then fell in 20-odd pieces off South Korea's west coast.
MSCI's broadest index of Asia Pacific shares outside Japan was up 0.9 percent, easing from a rise of 1.3 percent prior to the Chinese data, while Australian shares also trimmed earlier gains to stand up 0.7 percent, off a 1 percent rise before the Chinese announcement.
The annual rate of China's gross domestic product expansion eased to 8.1 percent in the first quarter from 8.9 percent in the previous quarter, data showed , below a 8.3 percent forecast and the weakest pace in nearly three years.
"We are slightly disappointed," said Kevin Lai, economist at Daiwa in Hong Kong.
"We still believe there should be more policy relaxation to add to growth domestically and offset weakness in exports," Lai said, adding that Thursday's stronger-than-expected new Chinese lending data was "an indication the government is quite ready to provide more monetary policy support to show that at least the economy is on track for a soft landing."
Hong Kong shares were up 1.5 percent, off a 1.7 percent rise before the data while Shanghai shares erased most of earlier gains to be up 0.2 percent.
The Australian dollar fell below $1.040 from around $1.0430 before the Chinese GDP data was released. Australian shares and currency are highly sensitive to economic data from China, which is Australia's top trade partner.
Australian equities rose on Thursday after data showed the country's employment far outpaced expectations last month, suggesting the economy was faring better than many feared.
Japan's Nikkei average rose as high as 1.6 percent but retreated to stand up 1.3 percent.
Financial markets showed little reaction to North Korea's rocket launch, with Seoul shares opening up 0.8 percent and the South Korean won touching a one-week high.
"The launch itself has very limited impact to broad financial markets," said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo.
"But North Korea has lost face, and this could push them to developing nuclear weapons, keeping medium- to long-term tension," he said. "That's the longer-term risk for the markets, and we can't anticipate how that would impact markets just yet."
Major U.S. and European stock indexes rose more than 1 percent while the euro gained on Thursday, as a positive outcome of the Italian bond sale and speculation then that China's Q1 GDP number would top forecasts revived risk appetite.
Italy's debt rallied for a second day running on Thursday, pushing its 10-year bond yields down 13 basis points to 5.40 percent and the yield on three-year benchmark tapped at auction down 12 bps to 3.84 percent.
Italy's 4.88 billion euro sale produced mixed results, but some had anticipated a weaker auction after Spain failed to draw enough demand for its auction last week.
Thursday's sale brings Italian bond issuance to nearly 37 percent of an estimated yearly target of 215 billion euros, while Spain is almost halfway through its annual funding plan.
The euro eased 0.1 percent to $1.3175, after hitting a 1-week high of $1.3213 on Thursday. The dollar inched up 0.2 percent against the yen at 81.05 yen.
Other data on Thursday showed the U.S. trade deficit shrank 12.4 percent to $46 billion in February for the biggest month-to-month decline since May 2009, as exports hit a record high, bolstering optimism over the outlook for corporate earnings.
Oil eased on Friday, reversing previous day's gains made on the China speculation and a weaker dollar triggering buying of riskier assets. U.S. crude futures fell 0.2 percent to $103.42 a barrel while Brent crude fell 0.4 percent to $121.24 a barrel.
Asian credit markets firmed with the rising equities, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by about 4 basis points.
Editing by Richard Borsuk