Asian stocks rose on Friday as strong earnings from economic bellwethers such as Caterpillar tempered concerns about a global slowdown, while the euro steadied ahead of European bank stress test results later in the day.
European stocks <.FTEU3> were expected to open little changed as investors awaited the test results. Worries about the health of the region's banks have driven up funding costs and weighed on share prices since Greece's debt crisis triggered fears that the euro zone could unravel.
The euro jumped more than 1 percent against the dollar on Thursday to around $1.29 and European bank stocks rose across the board in a sign that investors are starting to hope the worst is behind the region's financial industry.
But a lack of details about the terms of the tests and earlier divisions among European Union members over how much information will be made public has made investors wonder if the assessments would be tough or transparent enough.
Buoyed by robust U.S. earnings reports, Asian stocks outside Japan <.MIAPJ0000PUS> rose 1.6 percent despite wariness over the European tests. They looked set to post a 2.5 percent gain on the week, with Asia ex-Japan equity funds seeing strong inflows.
Japan's Nikkei <.N225> rose 2.6 percent.
There is obviously the risk that if too many banks pass and do so with a comfortable margin, the test may be judged as too easy to have actually been informative about the strength of the banking system, said Goldman Sachs analyst Nick Kojucharov wrote in a note.
Ironically, word of a few small failures in fiscally weaker countries such as Portugal or Spain could actually boost confidence in the vigorousness of the testing process. The results are expected around 1600 GMT, though some sources said they could be released earlier.
Analysts say the most concern is over how the banks' holdings of European sovereign debt will be treated and whether the assumed haircuts or expected losses on the debt are stringent enough.
It is very important that banks demonstrate that they have nothing to hide, said Nomura analyst Peter Westaway in a note, adding that the most important advantage of the tests is likely to be that they will provide enough transparency to allow analysts to conduct their own stress tests on banks in future.
A positive response to the test results would like spur investors to return to riskier assets, even though the euro zone's debt problems will take years to resolve.
However, even if most banks pass the test, analysts estimate lenders in the region will need to raise as much as 90 billion euros in fresh capital as they recover from the credit crisis and comply with new regulations, which could blunt any initial gains.
Major U.S. share indexes rose as much as 2.7 percent overnight as robust quarterly results from construction and mining equipment maker Caterpillar , 3M and other U.S. multinationals suggested the global economy may be on stronger footing than previously thought.
A string of weak U.S. economic data in recent weeks and worries that Europe's debt crisis could derail its already fragile recovery have put heavy pressure on markets, but there are signs that investors are slowly returning to riskier assets.
Emerging markets equity funds retained some of their momentum from the previous week, with Asia ex-Japan Equity Funds taking in over $800 million for the second week running, according to data from fund-tracking firm EPFR Global.
Crude oil futures steadied above $79 a barrel after jumping to 11-week highs overnight as a potential storm threatened production in the Gulf of Mexico.
Shanghai copper also rose, chasing London which climbed to near two-month peaks, spurred by a weaker dollar and positive economic data on both sides of the Atlantic.
(Editing by Kim Coghill)