Asian shares extended gains to fresh two-month highs on Friday as solid euro zone sovereign debt sales and signs that Greece may be moving closer to a vital debt-swap deal eased concerns over Europe's refinancing capability, boosting appetite for riskier assets.
Upbeat earnings from more U.S. banks and further data confirming the U.S. economy is on a recovery track also helped underpin sentiment, which has been improving since the start of the year.
But a sluggish Chinese purchasing managers' survey for January took Chinese shares off their intraday highs, and many investors remain wary that more shocks could emanate from Europe in coming months.
The MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.2 percent and was set for a third weekly gain and a fourth straight session of increases. So far this year, it has gained close to 7 percent.
Japan's Nikkei average <.N225> rose 1.3 percent to a two-month peak following a rise in U.S. equities on Thursday, when the Standard & Poor's 500 Index <.SPX> scaled a five-month high on better-than-expected results from Morgan Stanley
The relief of worries in the euro zone and the liquidity boost from the European Central Bank's cheap loans have spurred a lot of buying, said Rhoo Yong-suk, an analyst at Hyundai Securities.
On Thursday, Spain sold more longer-term debt than hoped, while France raised funds at yields lower than previous auctions in its first auction since Standard & Poor's knocked the country off its AAA rating last Friday.
This followed a strong result for a treasury bill auction earlier in the week from Portugal, the only euro zone country apart from Greece that is given junk status by all the major rating agencies.
Having cleared a key test of investor confidence for euro zone bonds, the market turned to economic data for clues on growth prospects outside the euro zone area.
The HSBC flash manufacturing purchasing managers index (PMI), the earliest indicator of China's industrial activity, stood nearly steady at 48.8 in January from 48.7 in December.
The index staying below the 50 level that demarcates expansion from contraction suggested China will keep policy options open to spur growth.
But more encouraging signs emerged from the United States on Thursday, with data showing the number of Americans filing for new jobless benefits dropped to an almost four-year low last week, and factory activity in the mid-Atlantic expanded moderately.
Market uncertainty has declined substantially in the past few days, with various implied volatility measures across assets falling to levels last seen in late July/early August 2011, analysts at Barclays Capital said in a research note.
Better economic data, progress in the Greek negotiations and successful peripheral European bond auctions have bolstered market sentiment for the time being, they said.
With the ECB's generous funding into the system helping to push euro zone bank-to-bank lending rates down to new 10-month lows on Thursday and soothing fears of an imminent credit crunch in Europe, the euro moved further away from a near one-and-a-half-year low hit last week.
The euro stood at $1.2958, not far from a two-week high of $1.2973 reached early on Friday, according to trading platform EBS.
Greece and its private bondholders resume debt-swap talks on Friday as they aim to overcome differences on interest payment that Athens must offer on its new bonds under the deal. Clinching the debt-swap deal is crucial for Greece to avoid a messy default.
If Greece reaches an agreement, there is every chance the euro will move higher still, BNP Paribas analysts wrote in a client note.
Signs of recovering global demand for credit was also seen in the Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by 7 basis points.
(Additional reporting by Ian Chua in Sydney and Joonhee Yu in Seoul; Editing by Kim Coghill)