Asian shares rose Thursday on growing hopes that Europe is taking concrete steps to contain its debt woes and head off a systemic banking crisis.
Strengthening investor confidence in the euro zone underpinned the single currency, while receding concerns about the banks' problems threatening the wider financial system sharply tightened Asian credit markets.
Markets are feeling better. The sense is that things are beginning to be put in place, bondholder haircuts, bank recapitalizations and the EFSF expansion, said a Singapore-based trader with an Asian bank referring to the two-year old euro zone debt crisis.
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MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.1 percent, following a 1.4 percent gain in the MSCI world equity index <.MIWD00000PUS>, which posted an increase for the sixth session in a row on Wednesday.
The Nikkei average <.N225> rose 1.15 percent Thursday to a four-week high, with shares of major exporters such as Sony Corp <6758.T> rising as players bought their shares back on tentative signs of progress in the European debt crisis.
In a sign that some stability and risk appetite may be returning, the overall market volatility as measured by the VIX index <.VIX>, Wall Street's so-called fear gauge, has hovered around 30. The level, pulling back sharply from crisis levels near 50 hit in August, suggested investors are less inclined to seek protection in stock index options against an equity market slide.
In credit markets, that had been feeling the strain of waning confidence in the financial system in recent months, spreads on the iTraxx Asia ex-Japan investment grade index narrowed by about 15 points.
But the move is likely an adjustment to a recent oversold condition and the markets were not yet out of the woods, some analysts say.
The Vix still remains at an elevated level and the recent decline is merely a rebound from an excessively pessimistic view in the markets, said Junya Tanase, chief strategist at JPMorgan Chase in Tokyo.
Rather than a sign of a full-fledged risk-on returning, it is just an evidence of a slight easing of risk aversion sentiment.
The euro stayed bid early in Asia Thursday, having jumped to a near one-month high on the dollar as Europe took a step closer to shoring up its financial rescue fund.
Lawmakers in Slovakia struck a deal Wednesday to ratify a plan to bolster the euro zone's rescue fund by Friday, effectively ending a crisis that had threatened the currency's main safety net. Slovakia is the only country in the 17-nation bloc left to approve the revamp of the fund.
Adding to the sense of urgency, the President of the European Commission, Jose Manuel Barroso, said Europe needed to take decisive action on Greece and outlined a broad plan to contain the debt crisis.
As European officials step up efforts to provide a more specific roadmap to resolve its debt woes and recover investor confidence, the European Union is expected to announce a bank recapitalization plan designed to cushion the impact any default by Greece could have on the region's banks.
Germany and France, the leading powers in the bloc, have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit Oct. 23.
Oil prices fell Thursday, with Brent crude futures down 0.2 percent at $111.10 a barrel after rising the day before for an 11.6 percent gain over six sessions. U.S. crude futures fell 0.8 percent to $84.89 a barrel, after snapping a five-session streak of higher closes on Wednesday.
China's trade surplus narrowed in September for a second month in a row as growth of exports and imports both fell below forecasts, reflecting global economic weakness. Exports rose 17.1 percent last month from a year ago, slowing from a 24.5 percent gain in August, and imports increased 20.9 percent, compared with August's 30.2 percent rise.
Hong Kong's benchmark Hang Seng Index <.HSI> rose 1.5 percent while the Shanghai Composite <.SSEC> was up 0.4 percent.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Alex Richardson)