Asian stocks jumped to a one-month high on Tuesday, with banks extending gains on hopes the struggling global financial system is stabilizing, despite reports showing the U.S. economy is deteriorating further.
Major European stocks were expected to open slightly lower, with dealers expected to pause after a five-day winning streak.
The dollar edged higher against the euro and the yen while U.S. Treasuries were steady, awaiting word on whether the Federal Reserve would buy government debt to stimulate the economy.
We still can't really relax, since we won't know the full details of this profit until quarterly results come out, and there's still a lot of uncertainty, said Takashi Ushio, head of the investment strategy division at Marusan Securities in Japan.
But they do seem to have pulled back from the worst danger.
The rebound has squeezed some investors who bet against equities, forcing them to buy back shares, but analysts are divided over whether the rally can be sustained without a broad recovery in investor confidence.
The MSCI index of Asia Pacific shares traded outside Japan <.MIAPJ0000PUS> rose for a third day, gaining 1.75 percent to a one-month high, with the materials, financial and consumer staples sectors providing the most support.
Japan's Nikkei share average <.N225> rose 3.2 percent to its highest close since Feb 9 amid strong gains in banking shares. On a 20-day rolling basis, the Nikkei's respectable 4 percent gain has outperformed the 0.3 percent loss on European stocks <.FTEU3> and a 2.6 percent decline in U.S. shares
Australia's benchmark S&P/ASX 200 index <.AXJO> rose 3.1 percent, also powered by banks. Shares of Westpac Bank
Hong Kong's Hang Seng index <.HSI> climbed 2 percent and was on its way to a sixth consecutive winning session. A shift out of bets against HSBC <0005.HK> pushed the shares of Europe's biggest bank up 5 percent.
Wall Street snapped a four-day winning streak overnight after American Express Co
U.S. industrial output fell to its lowest level in almost seven years in February, while manufacturing in New York State slumped further this month, data on Monday showed.
CENTRAL BANKS MULL BOND BUYS
U.S. Treasuries were largely steady ahead of a two-day policy meeting of the Federal Reserve that begins on Tuesday.
The yield on the benchmark 10-year note has been unable to rise above 3 percent after four attempts in the last few months, with investors wondering if the Fed will soon start buying long-dated Treasuries to drag rates lower in other markets.
The yield is currently 2.97 percent.
Goldman Sachs economist Ed McKelvey still believes the Fed will shy away from that option for now because the worst of the consumer retrenchment may have passed, equity markets have improved lately and recent comments from Fed officials have suggested otherwise.
He said the outcome of the meeting this week will likely be identical to the January meeting.
While we see several reasons why Treasury purchases make even more sense now than they did then, the FOMC appears disinclined to take this step yet, he said in a note.
The Bank of Japan is expected to discuss whether to raise its purchases of government debt at a two-day meeting ending on Wednesday, but market participants were unsure if the central bank will make such a move at this week's board meeting.
June 10-year futures fell 0.33 point to 138.58. The benchmark 10-year yield was largely flat at 1.30 percent.
Outright purchases of government bonds is one of unorthodox policy options some central banks, such as the Bank of England, have resorted to because they have already chopped interest rates down to nearly zero.
The euro edged up against the U.S. dollar, in sight of five-week highs hit the previous day and girding for a clear break above $1.3000. Positive comments from commercial banks have improved confidence among investors and whetted their appetite for risk, though skepticism was endemic.
Recent rise in share prices are merely led by players' unwinding their short-positions and the currency market is merely reacting to the move in stocks, said a trader at a Japanese bank.
After hitting a near three-year high on March 4, the ICE U.S. dollar index <.DXY>, a measure of its performance against a group of major currencies, has fallen about 3 percent.
Gold slipped 0.5 percent to $918.50 per ounce in the spot market, inching lower as the equity rally gathered pace.
U.S. crude for April delivery slipped 0.4 percent to $47.16 a barrel. Since the beginning of the year, oil has bounced around a range of $50 to just below $40.
(Additional reporting by Elaine Lies in TOKYO; Editing by Kim Coghill)