Traders work at their desks at the Frankfurt stock exchange
Representation Image REUTERS

Asian shares and the euro extended a rally into a second day Tuesday as investors were buoyed by expectations that European policy makers will outline details of how they will leverage a bailout fund to avert contagion in sovereign debt markets.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.6 percent, adding to Monday's jump of more than 2 percent. The index hit a seven-week low last Friday. Japan's Nikkei <.N225> closed up 2.3 percent, moving further away from two-and-a-half year lows also hit last week.

U.S. stocks snapped a seven-session losing streak on Monday, partly supported by robust holiday sales, helping to buoy some Asian markets with export exposures to the United States, such as Korea and Taiwan, while defensives and beaten-down energy and materials sectors pulled Hong Kong and Shanghai shares higher.

Some positive sentiment hit the markets which, after a recent steep decline, were offering good valuations and encouraging temporary buyback, said Hirokazu Yuihama, senior strategist at Daiwa Capital Markets.

Asian markets largely shrugged off a French media report citing several sources as saying Standard & Poor's could change the outlook of France's top-notch rating to negative within the next 10 days, but European share markets were set to dip.

Financial spreadbetters expected Britain's FTSE 100 <.FTSE> and Germany's DAX <.GDAXI> to open down 0.1 percent, and France's CAC-40 <.FCHI> to open down 0.4 percent. <.EU>

Eurozone finance ministers will meet later Tuesday to approve detailed operational rules for the region's bailout fund, the European Financial Stability Facility, paving the way for the 440 billion euro facility to draw cash from investors.

But with a history of initiatives that fall short of market expectations, analysts at Barclays Capital warned it would be premature to be confident that Europe's leaders are close to a solution to the 2-year-old debt crisis.

So far, European summits have delivered compromise solutions that have been deemed either less than credible or too complex by markets, they said in a note.

The recent round of proposals does not seem any different and suggests that investors should exercise caution buying risky assets, especially after a rally that has been aided by light market positioning.

ITALY AUCTION IN FOCUS

The euro inched up 0.3 percent to $1.3364 on Tuesday, after rising more than 1 percent on Monday to a high of $1.3398. The dollar index <.DXY> measured against six key currencies slipped 0.3 percent.

Commodities, a gauge for investor risk appetite, were steady after Monday's rally, with gold inching up 0.1 percent above $1,700 an ounce and oil steadying after a rise of more than $1 on Monday.

We are fairly cautious, given very few reasons to be optimistic, and I doubt if optimism can be sustained throughout the week, especially with many meetings and bond supplies, said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

Germany and France are reportedly working on proposals for a more rapid fiscal integration in Europe ahead of a European Union summit on Dec. 9, but the European Central Bank has defied calls for a stepped-up role in helping resolve fiscal problems within the 17-member euro zone.

Concerns about the ability of the highly indebted euro zone countries to pay off their ballooning public debt have made their sovereign bonds a prime target for market attacks, pushing yields to levels widely seen as unsustainable.

Market players were closely watching the outcome of this week's auctions, with up to nearly 19 billion euros in new bonds expected to be issued by Belgium, Italy, Spain and France.

Italy plans a 8 billion euros bond sale later on Tuesday. Ten-year bond yields were stuck above 7 percent, a level that forced Greece, Ireland and Portugal to seek international aid.

Tension in eurozone money market and banks' reluctance to lend to each other further intensified on Monday, with three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, rising to 1.477 percent from 1.475 percent.

Reflecting global market strains, the Bank of Japan supplied dollars in market operations for the fourth time this month on Tuesday, providing $100 million in an operation maturing in three months and $1 million maturing in a week.

(Editing by Alex Richardson)