Asian shares rose and the euro firmed on Monday on hopes Europe will come up with some concrete steps this week towards activating a euro zone bail-out fund that is crucial to relieving funding stresses on the region's troubled economies.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.6 percent, after slumping to its lowest level since early October on Friday to mark a fourth consecutive week of declines.
Japan's Nikkei <.N225> gained 1.9 percent after hitting its lowest in two and a half years on Friday. <.T>
With a European Union summit looming on December 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 to buy sovereign bonds.
Euro zone finance ministers will meet on Tuesday, and detailed operational rules for the region's bailout fund, the European Financial Stability Facility (EFSF), are ready for approval. This would pave the way for the 440 billion euro facility to draw cash from investors.
Traders said sentiment was also bolstered by a report in Italian newspaper La Stampa suggesting the International Monetary Fund (IMF) was preparing a rescue plan worth up to 600 billion euros for Italy, more than the IMF 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 sell-off on Monday forced immediate action. Official sources in Rome said they were unaware of any request for assistance from Italy.
The euro was swept higher in thin trade on Monday by a wave of short-covering -- when traders buy back a currency to realise gains on an earlier bet it would fall -- rising as high as $1.3342 from $1.3230 late in New York on Friday.
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.
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 Italy's 8 billion euro debt auction and German CPI and consumer confidence data, both due later on Monday.
On Friday, Italy paid a euro lifetime high yield of 6.5 percent to sell new six-month paper, while yields on 10-year government bonds ending last week at more than 7.3 percent, in the territory that forced Greece, Ireland and Portugal to seek international bailouts.
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.
Bearish sentiment still prevailed in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index widening slightly early on Monday.
(Additional reporting by Ian Chua; Editing by Alex Richardson)