Asian shares rebounded modestly on Friday and the euro clung to tentative gains, after brighter corporate news lifted U.S. stocks and debt-ladened Italy was able to fund itself at a bond auction.
Credit spreads tightened and copper prices rose as investors' appetite for riskier assets improved somewhat, but caution remained to the fore amid a European debt crisis that appeared no closer to resolution.
It's very difficult to trade these days, what with the binary headlines coming out of Europe, said a Singapore-based credit market trader with an Asian bank.
Easing risk aversion nudged up yields on Japanese government bonds, but crude oil was unable to sustain Thursday's 2 percent rally, which had been partly driven by jobs data pointing to a slight improvement in the U.S. economy.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose around 1.14 percent, clawing back some of the losses from a sharp sell-off in the previous session.
U.S. stocks had risen nearly 1 percent on Thursday, after drugmaker Merck
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 20 percent below its 2011 high reached in April.
Japan's Nikkei share average <.N225> swung between positive and negative territory, before ending the morning trading session down 0.2 percent. 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 2-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 stabilise the country's borrowing costs.
The euro traded around $1.3610, steady on the day and up from 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 1 basis point to 0.970 percent.
Commodities markets were mixed, with London Metal Exchange copper gaining 0.9 percent and gold rising 0.5 percent, while oil was flat-to-lower.
U.S. crude was little changed around $97.80 a barrel and Brent crude slipped 0.3 percent to $113.39.
(Additional reporting by Umesh Desai in Hong Kong and Lisa Twaronite in Tokyo; Editing by Kavita Chandran)