Asian shares rebounded on Friday and the euro clawed higher, with European stocks also expected to make gains after brighter corporate news lifted U.S. stocks and debt-laden Italy was able to fund itself at a bond auction.
Commodities mostly rose as investors' appetite for riskier assets was boosted somewhat by signs of a slight improvement in the U.S. economy, but caution remained to the fore amid a European debt crisis that appeared no closer to resolution.
Event risk is still rampant across markets and that trend is going to continue until there is a proper resolution to the euro zone crisis, said IG Markets analyst Stan Shamu.
Data on Thursday showing U.S. jobless claims fell to a 7-month low contributed to some easing of risk aversion, which nudged up yields on Japanese government bonds and shrank Asian credit spreads a touch.
Japan's Nikkei share average <.N225> rose 0.2 percent and MSCI's broadest index of Asia Pacific shares outside Japan climbed 1.2 percent, recouping some of the losses suffered in a sharp sell-off in the previous session.
Financial bookmakers forecast the FTSE 100 <.FTSE> to open up 0.7 percent, and called Germany's DAX <.GDAXI> up 0.7 percent and France's CAC-40 <.FCHI> up 0.5 percent.
U.S. stocks had risen nearly 1 percent on Thursday, after drugmaker Merck & Co (MRK.N) cheered investors by raising its dividend and network equipment maker Cisco Systems (CSCO.O) reported earnings that beat analysts' expectations.
Citi analysts said the Asia ex-Japan region saw accelerated fund inflows in the week ending in Wednesday, compared with the previous week, with Hong Kong and China the main beneficiaries of new money.
Nonetheless, the MSCI Asia ex-Japan index remains nearly 20 percent below its 2011 high reached in April. Both the Nikkei and the MSCI Asia ex-Japan were on course for weekly losses of more than 3 percent.
Italy, the latest euro zone nation to find itself in the bond market's crosshairs, moved closer to a national unity government on Thursday, while its treasury managed to sell 1-year bills at yields of less than 7 percent -- the threshold that investors believe renders its debt burden unsustainable.
Market players were split, however, on whether to fret that Rome was paying the highest interest rate on its borrowing in 14 years or celebrate that it was able to hold a successful bond auction at all.
Some took the Italian auction as good news because it wasn't a worst-case scenario, but overall, the situation there is a minus, and not a plus, said Yutaka Miura, senior technical analyst at Mizuho Securities in Tokyo.
The prospect of Italy buckling under its 2 trillion euro debt load has raised fears over Europe's two-year-old crisis to a new level, because the euro zone's bailout fund (EFSF) is not big enough to rescue the bloc's third largest economy.
Italy's funding vulnerability presents a serious risk to the global financial system and forces euro zone leaders to grapple with a lose/lose dilemma, wrote RBS macro credit analysts Edward Marrinan and Edward Young in a note.
Leave one of the euro area's largest economies at the mercy of the funding markets or deploy the under-resourced EFSF in an effort to stabilize the country's borrowing costs.
The euro traded around $1.3620, up around 0.1 percent on the day and well above Thursday's trough at $1.3481. The dollar eased 0.2 percent against a basket of currencies <.DXY>.
Spreads tightened on the Asia ex-Japan iTraxx investment grade index, a gauge of risk appetite, while the yield on 10-year Japanese government bonds rose 0.5 basis point to 0.965 percent.
Commodity markets were mostly firmer, with London Metal Exchange copper gaining 0.9 percent and gold rising 0.4 percent to around $1,767 an ounce.
But oil markets were mixed after a 2 percent rally the previous day, with U.S. crude up 0.3 percent at just over $98 a barrel while Brent crude slipped 0.1 percent to around $113.60.
We had some good news yesterday from Italy on their bond sale, but the oil market is trading from headline to headline, said Ben Le Brun, market analyst at OptionsXpress in Sydney.
Right now there's not enough to give investors a clear direction for prices.
(Additional reporting by Umesh Desai in Hong Kong and Lisa Twaronite in Tokyo; Editing by Kavita Chandran)