Asian shares rose on Thursday on growing optimism that Europe will take concrete steps to contain the region's debt woes and head off a systemic banking crisis, but European equities were seen weaker as credit problems fueled growth concerns.
Strengthening investor confidence in the euro zone underpinned the single currency, while receding concerns about the banks' problems threatening the wider financial system sharply tightened Asian credit markets.
Markets are feeling better. The sense is that things are beginning to be put in place, bondholder haircuts, bank recapitalizations and the EFSF l,,lexpansion, said a Singapore-based trader with an Asian bank referring to the two-year old euro zone debt crisis.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.4 percent, following a 1.4 percent gain in the MSCI world equity index <.MIWD00000PUS>, which posted an increase for the sixth session in a row on Wednesday.
The Nikkei average <.N225> rose to a four-week high on Thursday, with shares of major exporters such as Sony Corp <6758.T> rising as players bought back on tentative signs of progress in the European debt crisis.
In a sign some stability and risk appetite may be returning, the overall market volatility as measured by the VIX index <.VIX>, Wall Street's so-called fear gauge, has hovered around 30.
The level, pulling back sharply from crisis-like levels near 50 hit in August, suggested investors are less inclined to seek protection in stock index options against an equity market slide.
In credit markets, that had been feeling the strain of waning confidence in the financial system in recent months, spreads on the iTraxx Asia ex-Japan investment grade index narrowed by about 17 points due to easing worries.
Another sign of activity picking up is an expected sale of 3-year, $300 million dollar bonds by China Merchants Bank, the first such deal out of Asia in a month.
But some analysts remained cautious of the latest easing of tension, seeing it as an adjustment to a recent over-sold condition and saying the markets were not yet out of the woods.
The Vix still remains at an elevated level and the recent decline is merely a rebound from an excessively pessimistic view in the markets, said Junya Tanase, chief strategist at JPMorgan Chase in Tokyo.
Rather than a sign of a full-fledged risk-on returning, it is just an evidence of a slight easing of risk aversion sentiment.
The euro steadied in Asia on Thursday, having jumped to a near one-month high on the dollar as Europe took a step closer to shoring up its financial rescue fund.
Lawmakers in Slovakia struck a deal on Wednesday to ratify a plan to bolster the euro zone's rescue fund by Friday, effectively ending a crisis that had threatened the currency's main safety net. Slovakia is the only country in the 17-nation bloc left to approve the revamp of the fund.
Adding to the sense of urgency, the President of the European Commission, Jose Manuel Barroso, said Europe needed to take decisive action on Greece and outlined a broad plan to contain the debt crisis.
As European officials step up efforts to provide a more specific roadmap to resolve its debt woes and recover investor confidence, the European Union is expected to announce a bank recapitalization plan designed to cushion the impact any default by Greece could have on the region's banks.
Germany and France, the leading powers in the bloc, have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit on October 23.
CHINA SLOWS, IMF WARNS
Europe's sovereign debt crisis has dampened investor sentiment, caused market turmoil and added to uncertainty over the global economy, which was underscored by China's data.
European equities are seen opening lower on Thursday following sharp gains in the previous session as investors book profits after weaker-than-expected Chinese trade data suggested the country was feeling the impact of a global slowdown.
Germany's DAX <.GDAXI> and France's CAC-40 <.FCH1> were expected to open down as much as 0.4 percent each.
China's trade surplus narrowed in September for a second straight month as growth of exports and imports both pulled back, reflecting global economic weakness and domestic cooling.
Exports rose 17.1 percent last month from a year ago, slowing from a 24.5 percent gain in August, and imports increased 20.9 percent, compared with August's 30.2 percent rise.
Hong Kong's Hang Seng Index <.HSI> rose 1.9 percent on Thursday, poised to extend a five-session winning streak helped by mainland property developers that posted strong gains in contract sales between January and September.
Slower demand in the world's second-largest oil consumer weighed on oil prices, pushing Brent crude down to near $111 on Thursday, snapping six days of gains.
U.S. November crude slipped 0.8 percent to $84.86 a barrel, after tumbling to an intraday low of $84.64.
Near-term risks to Asia's economies are decidedly rising due to Europe's debt woes and a U.S. slowdown, requiring policymakers to be nimble and prepared to rapidly reverse course, the International Monetary Fund said on Thursday. It also warned about a risk of capital outflows from the region.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Kavita Chandran)