Improving global manufacturing data lifted Asian shares on Tuesday near levels before the collapse of Lehman Brothers in September, but the pace of gains slowed as investors pondered how much longer a heady three-month rally will last.
Reports on Monday showed easing contractions in manufacturing activity in the United States, the euro zone and Britain last month, while China reported a further expansion in factory activity.
The data reinforced expectations the worst in the global economy is over, while the widely expected bankruptcy filing by General Motors
However, some of the other riskier asset classes which rose on Monday stalled or fell in Asia on Tuesday, highlighting investor caution after a steady run-up in prices. European shares were set to fall in a breather to the previous sessions' rally.
U.S. crude futures fell on Tuesday but held above $68 a barrel as investors took profits from a jump of more than 3 percent the day before which carried oil to its highest level since early November.
Safe-havens such as the dollar also steadied on Tuesday after falling in the previous session.
A recovery is well underway and the market is following positive economic news, said Brian Eley, fund manager with Eley Griffiths, which oversees about A$500 million ($406 million) in Australia.
Eley added materials, energy and cyclical stocks would show the strongest moves in the initial phase though he also warned the rally could fade.
There is always some doubt as often these rallies can over-shoot the fundamentals, he said.
The MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS> rose 0.5 percent after earlier in the day hitting its highest since September 29, just weeks after the Lehman's catastrophic collapse. The gain was modest when compared to the combined 5.2 percent jump in the previous two sessions.
The index has now surged some 65 percent from lows in early March, spurred by signs of stabilization in the battered banking sector and credit markets, and by hopes that the global downturn was bottoming out.
The MSCI index is not far off the levels of September 12, the Friday before Lehman collapsed, sparking a rout in global markets that hit its nadir in early March.
Japan's Nikkei average <.N225> advanced 0.3 percent, after at one point hitting its highest since October 8, while Australia <.AXJO> rose more than 1 percent and markets in Singapore and Shanghai <.SSEC> posted more modest gains.
However, some other markets retreated. Hong Kong <.HSI> shares were down 0.3 percent, dragged down in part by a 3.3 percent fall in shares of Industrial and Commercial Bank of China <1398.HK> after Goldman Sachs was seen selling a stake in the Chinese lender.
Seoul shares <.KS11> gave up gains to dip 0.2 percent following reports that North Korea was preparing another missile launch after its nuclear test last week.
RBA'S EASING BIAS
Recent data appear to show the global economy has hit bottom, as shown by Monday's manufacturing reports and Australia's trading data on Tuesday that hinted the country may have dodged a recession last quarter.
But questions remain over the timing and strength of any recovery. That caution is also being reflected by central banks worldwide, which after sharply cutting interest rates are now mostly on hold and eager to keep their options open.
The Reserve Bank of Australia kept interest rates on hold as expected, but surprised investors by reiterating its readiness to ease monetary policy if need be.
That was seen as an attempt to restrain the market from pricing in rate hikes too soon, which could derail a recovery before it gains speed.
The Australian dollar fell slightly to $0.8077, after holding near eight-month highs of $0.8100 before the decision.
The U.S. dollar, which has been whipped recently by investors' preference for higher-yielding assets and concerns about rising U.S. debt levels, steadied against a basket of major currencies <.DXY> at 79.302.
The U.S. currency had hit a new low for the year on Monday.
Japanese government bonds, however, took a hit, as investors turned to higher-risk assets which offered the prospect of stronger returns. The yield in the 10-year note rose at one point to as high as 1.515 percent, matching peaks last seen in mid-November.
Yields also rose in Japan ahead of Tuesday's 10-year auction, while tracking a sell-off in U.S. Treasuries on Monday that led the gap between two-year and 10-year Treasury notes to match the previous record high hit on Friday of 275 basis points.
(Editing by Tomasz Janowski)