Asian stocks rose on Monday and the euro edged up on hopes that new technocratic leaders in Italy and Greece will take decisive action to save their indebted nations from bankruptcy and fend off a wider financial meltdown in the euro zone.
Commodities rose, credit spreads tightened and safe haven government bond yields climbed, all suggesting improved risk appetite, but the renewed confidence faces a big test later on Monday, when Italy is scheduled to hold an auction of 5-year bonds.
European stocks were also expected to gain, with financial bookmakers calling London's FTSE 100 <.FTSE> to open up 0.5 percent, while benchmark indexes in France <.FCHI> and Germany <.GDAXI> were seen rising 1 percent. <.EU>
It's good that Italy and Greece avoided political vacuums. But we have to see whether national unity governments will function, said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank in Tokyo.
Italy's president appointed former European Commissioner Mario Monti on Sunday to head a new government with the task of restoring market confidence in the euro zone's third largest economy, whose debt burden is too big for the bloc to bail out.
Meanwhile in Greece, Lucas Papademos, a former European Central Bank policymaker, has been sworn in as prime minister and is under pressure to implement radical reforms.
Everything went to plan if you like over the weekend, so we're seeing a positive reaction, said Michael Turner, strategist at RBC Capital Markets in Sydney.
Japan's Nikkei share average <.N225> rose 1.1 percent, while MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> was up 1.6 percent, with indexes in Hong Kong <.HSI>, Taiwan <.TWII> and South Korea <.KS11> all jumping more than 2 percent. <.T>
S&P 500 futures rose 0.4 percent, suggesting a firmer start on Wall Street later.
The gains in Asia continued a rebound that began late last week, with world stocks <.MIWD00000PUS> rising 2 percent on Friday after Italy's Senate approved austerity measures demanded by the European Union.
John Noonan, head of IFR Markets in Sydney, said the mood on Wall Street suggested that the S&P would sustain a healthy year-end rally as long as Europe avoided total catastrophe.
The risk bulls say there is just as much anxiety from certain investor groups over the possibility of missing the next 10-15 percent rise in the stock market as there is of the possibility of a meltdown in Europe, he said.
The euro traded around $1.3770, up nearly 0.2 percent, having risen as high as $1.3811 in early trade.
Traders warned the market's continued positive reaction hinges on how Italy's planned sale of 3 billion euros of five-year bonds on Monday is received. Subscriptions close at 1000 GMT.
Italian 10-year bond yields soared above 7 percent last week to levels seen as unsustainable. Borrowing costs of more than 7 percent have previously driven Greece, Ireland and Portugal to seek bailouts.
While Italian yields have come off their peaks they remain elevated, and analysts fear Rome's potential inability to fund itself could be a systemic risk given the size of its economy and its status as the world's third-largest government debtor.
Credit spreads tightened in Asia, while in the Japanese government bond market 10-year yields rose 1.5 basis points to 0.975 percent, mirroring a similar move in U.S. Treasuries, where 10-year yields rose around 7 basis points to 2.129 percent.
Commodities markets held gains from the end of last week or rallied further, with U.S. crude creeping above $99 a barrel and Brent crude gaining 0.3 percent to $114.55.
London Metal Exchange copper rose 3 percent, heading back toward the $8,000 a tonne level, and gold gained 0.3 percent to around $1.794 an ounce.
(Additional reporting by Ian Chua in Sydney and Umesh Desai in Hong Kong; Editing by Richard Borsuk)