Asian shares and the euro edged higher on Tuesday as markets waited for a second liquidity injection from the European Central Bank to gauge risk appetite that has been somewhat dented by worries over high oil prices.
Brent crude oil futures slipped, extending losses after snapping a week-long rally on Monday, but concerns over supply from the Middle East helped stem the slide.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> edged up 0.5 percent, with the defensive healthcare sector <.MIAPJHC00PUS> outperforming. The pan-Asia index has risen 13 percent this year, while Japanese equities have gained 14 percent.
Financial spreadbetters expected major European markets <.FTSE> <.FCHI> <.GDAXI> to open 0.1 to 0.5 percent higher. <.L><.EU>
Markets have risen too rapidly and may consolidate from time to time, (with people) looking to buy after prices fall. But underlying sentiment is gradually firming, as people believe they've seen the worst. said Xiao Minjie, chief economist at FuNNeX Asset Management in Tokyo.
He said that while ample liquidity supplied by global central banks was pushing crude prices higher, demand in Europe and China was unlikely to pick up strongly enough to lift oil prices near all-time peaks of around $150 that were scaled in 2008.
Looking to the ECB's longer term refinancing operation on Wednesday, analysts were focusing on the size of the gross allotment as well as net new liquidity. A poll showed 30 euro money market traders expect the ECB to allot 500 billion euros, with forecasts ranging from 200 billion to 750 billion euros.
The ECB's first liquidity injection into the system in late December helped stabilise markets by removing concerns about a liquidity crunch in Europe.
Although the issues surrounding Greek PSI (private sector involvement) and additional financial resources for Europe will likely dominate headlines, we believe that the upcoming LTRO and behaviour of energy prices are more important for market sentiment, said Barclays Capital analysts.
ECB in graphics: http://link.reuters.com/neg32s
For a 24-hr technical outlook on Brent:
NIKKEI ERASES LOSSES
Among equities in Asia, Japan's Nikkei average <.N225> erased morning losses to climb 0.9 percent to hit a fresh seven-month closing high, helped by expectations of buying from several investment trusts due to be launched on Wednesday.<.T>
Japanese chip-related stocks lost ground after chipmaker Elpida Memory Inc <6665.T> filed for protection from creditors on Monday but Elpida's woes helped lift Korean equities <.KS11>, boosting shares in rivals Hynix Semiconductor <000660.KS> and Samsung Electronics <005930.KS>.
The euro edged up 0.2 percent to $1.3431, off a near three-month high of $1.3487 reached on Friday. The dollar eased 0.3 percent against the yen at 80.33 yen, retreating from a nine-month high of 81.66 yen hit on Monday.
Market reaction was muted after Standard & Poor's on Monday cut Greece long-term ratings to 'selective default'.
Greece set a March 8 deadline for private holders of its bonds to participate in an unprecedented bond swap. The German parliament endorsed a recently approved second bailout for Greece with a comfortable victory.
Brent fell 0.5 percent on Tuesday to $123.55 a barrel, moving further away from a near 10-month peak above $125 a barrel on Friday. U.S. crude fell 0.5 percent to $108.05 a barrel. Brent has risen about 15 percent this year, supported in part by worries over supplies amid tensions between the West and Iran over Tehran's nuclear programme.
People were worried about the quick move in prices - they just sped up too fast, said Tetsu Emori, a fund manager with Astramax Co in Tokyo.
We may see some more correction and participants repositioning themselves before prices start to rise again.
London copper edged down 0.2 percent to $8,516 a tonne as slow demand from top consumer China spurred caution, but fresh signs of a U.S. economy on the mend helped limit losses. Copper has gained nearly 12 percent this year.
Data on Monday showed contracts for U.S. home resales rose to a near two-year high in January, boosting optimism that the housing market may be recovering.
Asian credit markets were subdued, with the spreads on the iTraxx Asia ex-Japan investment-grade index barely changed from Monday.
(Additional reporting by Manash Goswami in Singapore; Editing by Edwina Gibbs)