Asian shares jumped and the euro firmed Monday on hopes that Europe will come up with some concrete steps this week toward activating a crucial euro zone bailout fund and reports that the International Monetary Fund is considering helping Italy.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose more than 2 percent, after slumping to its lowest level since early October on Friday to mark a fourth consecutive week of declines.
Japan's Nikkei <.N225> also gained nearly 2 percent after hitting its lowest in two and a half years on Friday.
Traders said sentiment was bolstered by a report in Italian newspaper La Stampa suggesting the IMF was preparing a rescue plan worth up to 600 billion euros for Italy, more than the fund can currently provide on its own.
A source with knowledge of the matter told Reuters that contacts between the IMF and Rome had intensified but added it was unclear what form of support could be offered if a market selloff on Monday forced immediate action. Official sources in Rome said they were unaware of any request for assistance from Italy.
With a European Union summit looming Dec. 9, officials said at the weekend that Germany and France were exploring radical proposals for more rapid fiscal integration, possibly with fewer than the 17 countries that make up the euro zone.
The move would help fend off fierce market attacks on highly indebted countries and give more leeway for the European Central Bank (ECB) to buy sovereign bonds.
Eurozone finance ministers will meet on Tuesday, and detailed operational rules for the region's bailout fund, the European Financial Stability Facility, are ready for approval. This would pave the way for the 440 billion euro facility to draw cash from investors.
Talk about radical fiscal integration with fewer countries is slightly positive as it sounds like a pragmatic approach, said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo.
Oil, copper and precious metals rose, on the back of the rise in riskier equities, pulling commodity-linked currencies such as the Australian dollar higher in tandem.
Spot gold was up 1.6 percent, dragging palladium up nearly 3 percent and silver up nearly 2 percent, while oil prices rose more than 1 percent.
Commodities are up on short-covering as players who had been anticipating a deepening crisis and relentlessly avoided risks are relieved somewhat by signs European leaders are now moving with an elevated sense of urgency to catch up with the speed of market turmoil, said Koichiro Kamei, managing director at financial research firm Market Strategy Institute in Tokyo.
ITALY YIELDS DANGEROUSLY HIGH
The euro was swept higher in thin trade on Monday by a wave of short-covering -- when traders buy back a currency to realize gains on an earlier bet it would fall -- rising as high as near $1.3330 from $1.3230 late in New York on Friday.
The Australian dollar rose 0.5 percent to $0.9864.
Some market players, however, were sceptical that the gains for the euro would last long.
Unless we see a confirmation the IMF is working on such a programme, I suspect the market is going to want to sell into any further strength, said Robert Rennie, chief currency strategist at Westpac Bank in Sydney.
Traders said it was premature to expect investors to resume risk-taking ahead of key events this week, including up to nearly 19 billion euros in new bonds expected to be issued this week by Belgium, Italy, Spain and France.
The ECB is resisting mounting calls to expand its role in helping resolve the euro zone's fiscal problems, raising concerns about Italy being left without a financial backstop.
On Friday, Italy paid a record high yield of 6.5 percent for its six-month paper, while 10-year bond yields ended last week at more than 7.3 percent, in the zone that forced Greece, Ireland and Portugal to seek international aid.
Funding stresses for European banks escalated further, with the cost of swapping euros into dollars in the currency swap market reaching new three-year highs of 166 basis points on Friday, levels analysts said may make the European Central Bank tender more attractive for dollar-funding.
Equities' rally warmed sentiment in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by about 10 basis points on Monday.
Japanese government bonds fell to a three-month low as investors continued to take profits in an overbought market, and also ahead of a key 10-year auction later this week.
(Additional reporting by Ian Chua; Editing by Alex Richardson)