Asian shares fell and the euro trimmed gains Wednesday as caution set in over the chance for more progress in resolving euro zone debt woes after officials agreed to strengthen a rescue fund and seek more aid from the International Monetary Fund.
The earlier rise in Asian shares was mostly seen as a correction to last week's huge selling, with investors only tepidly scaling back risk aversion as they waited for more euro zone debt sales and meetings ahead.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose as much as 0.5 percent but then reversed course and was down 0.6 percent. It rose on Monday and Tuesday after slumping to a seven-week low on Friday. The index was set for a monthy loss of around 9 percent.
Japan's Nikkei <.N225> fell 1.1 percent, as sentiment was hurt by the downgrade by Standard & Poor's of several major U.S. and European banks.
The focus remains on who will give money, to which no fresh news was provided, said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo, adding that investors were likely relaxing their risk aversion stance.
In the end, whether the European Central Bank will become more actively involved in the debt crisis is key as it is the only viable lender. All other developments are mere technicals.
The euro was steady around $1.3336, but still well below Tuesday's high of $1.3443.
U.S. stocks rose on Tuesday on euro zone hopes as well as a bounce in U.S. consumer confidence in November in another sign the U.S. economy remains on a recovery path.
There is still a lot of concern about what's happening in the euro zone, but investors appear to be just a little bit more hopeful that progress has been made, said Juliette Saly, market analyst at Commonwealth Securities in Sydney.
Also heading into the end of the year, investors see our market has been more sold off than the U.S, she said adding also that follow-through movement hasn't been all that strong and volume was quite low.
This month, the Dow Jones Industrial Average <.DJI> has lost 3.3 percent while the Standard & Poor's 500 Index <.SPX> has fallen 4.6 percent.
Euro zone officials agreed on Tuesday on ways to leverage the firepower of their bailout fund, the 440-billion-euro European Financial Stability Facility, using both an insurance scheme and a co-investment program. They also agreed to extend further aid payments to Greece and Ireland.
Hopes rose for more involvement from the IMF after Eurogroup president Jean-Claude Juncker said they have agreed to rapidly explore ways of boosting the IMF's resources through bilateral loans so it can match the leveraged EFSF's capabilities.
Italy, which faces a dire funding situation with its skyrocketing borrowing costs, has had preliminary discussions with the IMF about financial support to cope with the euro zone's debt crisis, but no decision has been taken, several sources close to the situation said.
Italy had to pay a record 7.89 percent yield for its 3-year bonds on Tuesday, above levels which Greece, Ireland and Portugal were forced to apply for international bailouts, but drew strong demand, with the maximum 7.5 billion euros sold.
The inversion of three-year yields being above the 7.3 percent 10-yield was also noted in the Italian credit default swap curve, where the shorter-dated contracts were quoted higher than the 5-year CDS.
Euro zone funding strains persisted on Tuesday, with the spread between three-month euro Libor rates and overnight indexed swap rates reaching 87 basis points, near 90 hit in November, its highest since March 2009.
Banks were reluctant to lend to each other, pushing one-year euro/dollar cross currency basis swaps, or the premium that a borrower of dollars needs to pay to access funds, to 108 basis points, its most expensive level since 115 basis points in late 2008.
Reflecting a lack of incentives to take risks, Asian credit markets weakened slightly, with spreads on the iTraxx Asia ex-Japan investment grade index widening by three basis points on Wednesday.
We are seeing reduced liquidity and the only thing trading these days is high yield sovereigns and new issues, said a Singapore-based trader with a European bank. Markets want to see more definitive action and until then we wont see aggressive buying just on positive headlines.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Richard Borsuk)