Asian shares rallied more than 3 percent and the euro steadied Friday on hopes that Greece will abandon a proposed referendum on a European Union bailout, but investors remained cautious over a confidence vote scheduled for later in the Greek parliament.
Greece's abrupt call for a referendum, just days after a deal was struck to save the debt-stricken country from defaulting, sparked panic in global financial markets, prompting EU leaders to talk of a possible Greek exit from the euro zone to preserve the single currency.
Greek Prime Minister George Papandreou bowed to Cabinet rebels and agreed to step down and make way for a negotiated coalition government if his Socialist lawmakers back him in a confidence vote on Friday, raising hopes for a political consensus on the EU rescue framework.
The market regained some calm but uncertainty remains over the outcome of today's confidence vote, said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo. Uncertainty at this point entails risks, as it means delays in the efforts (to resolve the debt crisis).
MSCI's broadest index of Asia Pacific shares outside Japan jumped 3.1 percent, led by a more than 4 percent jump in materials as copper and oil rebounded. The index's energy sector soared 3.7 percent, while the technology sector gained 3.4 percent. Japan's Nikkei <.N225> share average rose 1.9 percent.
European shares were expected to make modest advances from Thursday's rally. Financial bookmakers called the FTSE 100 <.FTSE> to open up 0.3 percent, Germany's DAX <.GDAXI> to open up 0.5 percent and France's CAC-40 <.FCHI> to gain 0.3 percent.
Investors may be hunting for a bargains, but underlying concern about whether measures can really be implemented to rescue Greece from its debt crisis remained intact, said analyst Woon Khien Chia of the Royal Bank of Scotland in Singapore.
Nobody wants to take very big positions, she said, adding that even after the basic framework was agreed to rescue Greece, questions have already been raised about who was going to fund the bailout.
Late in October, Euro zone leaders struck a deal with private banks and insurers for them to accept a 50 percent loss on their Greek government bonds under a plan to lower Greece's debt burden, while asking Greece for severe austerity measures.
They also agreed that the European Financial Stability Facility, a bailout fund, would be leveraged to give it firepower equivalent to about 1 trillion euros ($1.4 trillion).
G20 leaders meeting in southern France will try to look beyond the Greek drama that has shaken their annual gathering and agree on measures that will convince markets the risk of further euro zone contagion can be stemmed.
ECB CUT SUPPORTS
Market sentiment was also supported by the European Central Bank's surprise rate cut of 25 basis points on Thursday, the first meeting under new President Mario Draghi. Draghi said the euro zone could enter a mild recession later this year.
The ECB's surprise move to cut rates suggested it took a preemptive move as it forecast growth slowdown, which gave a positive surprise to the market, Credit Agricole's Saito said.
The euro steadied against the dollar around $1.38.
Hong Kong's benchmark Hang Seng Index .HSI jumped more than 3 percent, recovering almost all of this week's losses, while the iShares A50 China tracker (2823.HK), an exchange-traded fund in Hong Kong that provides the most direct exposure to mainland markets, hit its highest since mid-August.
The ECB's rate cut bolstered Shanghai-traded commodities such as iron, zinc and copper. The most-active January copper contract on the Shanghai Futures Exchange jumped as much as 4.5 percent.
Brent crude held above $110 a barrel and U.S. crude rose 0.2 percent to $94.26.
Investors' appetite eased for protection in the options market against losses, with the CBOE Volatility index VIX <.VIX> -- a measure of expected volatility in the S&P 500 over the next 30 days often dubbed Wall Street's fear gauge -- falling to 30.50 on Thursday from 32.74 the day before.
The VIX was below 30 for most of the time in the 15 years up to 2008, before being driven close to 90 by the global financial crisis in October that year. It hit this year's peak at 48 in August.
As optimism buoyed riskier assets, Asian credit markets stabilized, with the spreads on the iTraxx Asia ex-Japan investment grade index narrowing sharply by more 20 basis points. The index is a gauge of investor risk appetite.
Its a bit more positive this morning although headline risks are still alive. Its just one step forward and two steps back, said a Singapore based trader with a European bank.
($1 = 0.728 Euros)
(Additional reporting by Umesh Desai in Hong Kong; Editing by Alex Richardson)