Asian stocks rose Tuesday and European shares looked set to extend gains as strong U.S. consumer spending data countered fears that the economy was slipping back into a recession.
But low volume and the inability to sustain early gains suggested a general lack of conviction among investors over how long the rebound will last.
Still, the slight gains in equities after a battering this month encouraged some investors to switch out of safe-haven assets like the Swiss franc and gold and buy high-yielding currencies such as the Australian dollar.
U.S. stock futures consolidated gains in Asia after solid overnight gains following news that consumer spending recorded its largest increase in five months in July in the United States.
European shares were expected to open higher, tracking gains on Wall Street and in Asia, with German and French indexes seen up as much as 0.8 percent and London shares expected to advance nearly 3 percent, catching up with the broader market following a holiday on Monday.
Japan's Nikkei rose 1.1 while Australia's .AXJO climbed 0.3 percent, though both indices were off early highs as players moved in to square positions before awaiting more evidence on whether the U.S. economy has turned a corner.
Pessimism about the health of the U.S. economy and worries about Europe's sovereign debt crisis have hammered global stock markets this month, driving MSCI's All-Country World Index down nearly 15 percent from its May high.
The MSCI Asia Pacific ex-Japan index is on track to post its worst monthly return since October 2008.
Even though Hong Kong shares are down more than 9 percent this month with valuations near the trough of the global financial crisis, Adrian Mowat, chief emerging markets strategist at JP Morgan, said there was more downside left as equities were still early in the downgrade cycle.
It is very important to remember that the turning point in markets is not when they start to look cheap but it is when the macroeconomic data is changing, signaling the tightening cycle is coming to an end, signaling markets are cheap or oversold, Mowat told Reuters Televison.
With China still ordering banks to set aside more deposits in reserves and allowing more yuan gains, that end may still be some way off, but that did not deter some brave investors.
Hong Kong-listed shares of China Construction Bank Corp (0939.HK), the world's No.2 lender, rose more than 4 percent after news that Bank of America Corp (BAC.N) will sell about half of its stake in the Chinese bank.
Excluding CCB, however, turnover in Hong Kong was very low.
Traders were eyeing an Italian bond auction later in the day which will serve as a barometer of investor demand after recent bond purchases by the European Central Bank have helped drive down Italy's borrowing costs.
Investors were also awaiting U.S. consumer confidence data for August and minutes from the Federal Reserve's last committee meeting on Aug. 9 which could offer more clues on divisions among board members over further stimulus measures.
WATCHING CREDIT MARKETS
Fears that the festering debt crisis would engulf larger euro zone economies like Italy and France have made investors such as U.S. money market funds reduce exposure to European banks and pushed their credit default swap spreads higher.
The Itraxx European senior financials index has pushed beyond the peaks seen during the last crisis, and at 247 bps the spread is starting to reflect credit ratings that are not reflective of their current ones.
On Tuesday, though, Asia credits were firmer with the spread on Asia ex-Japan iTraxx investment grade index tightening by 6 bps to 152 bps/154 bps.
Strong equity gains also put safe-haven bets like the Swiss franc, gold and U.S. Treasuries on the backfoot with a rare bit of good news out of Europe in the shape of merger news in Greece' banking sector Monday.
The U.S. dollar traded at 0.8184 Swiss francs, just below a five-week high of 0.8239 hit overnight, while the euro was at 1.1888 francs, not far off a seven-week high of 1.1970 francs touched on Monday.
U.S. Treasuries nursed losses with 10-year yields at 2.24 percent, up by about five basis points from Friday after Federal Reserve chief Ben Bernanke steered clear of announcing any fresh stimulus measures last week.
Spot gold stabilized around $1,790 per ounce levels after falling by nearly seven percent in about a week. It hit a record $1,911 last week.
Volume was thin with a number of Asian markets, including Singapore, Malaysia, Indonesia and the Philippines, out for holidays.
(Reporting by Saikat Chatterjee, Umesh Desai and Clement Tan in Hong Kong)