Asian stocks and the euro rose on Wednesday after upbeat U.S. and German data and strong demand for Spanish debt tempered risk-aversion, with investors' focus turning to a European Central Bank tender as a gauge for euro zone funding strains.
MSCI's broadest index of Asia Pacific shares outside Japan climbed 2.5 percent to a one-week high, recouping all of its losses from Monday, when news of the death of North Korean leader Kim Jong-il raised fears of regional instability and triggered a broad sell-off in riskier assets.
The risk-sensitive materials sector was among the best performers, rising more than 3 percent, while Taiwan led the pack with a 4.3 percent rally, as the government authorised a state fund to step in and support prices.
Several supportive factors temporarily relieved concerns that the euro zone debt crisis may deteriorate, but they are merely providing a one-off floor, with a real turnaround still nowhere near in sight, said Hirokazu Yuihama, senior strategist at Daiwa Capital Markets.
Industrial commodities such as oil and copper extended gains after data on Tuesday showing German business morale rose sharply and a recovery in U.S. housing markets, pulling up commodities-linked currencies such as the Australian dollar, often used to test risk appetite, which rose 0.6 percent.
U.S. crude futures rose $1 to above $98 a barrel and three-month copper on the London Metal Exchange was up 0.2 percent at $7,427 a tonne.
Gold hit a one-week high on the back of an easing dollar, which fell 0.3 percent against a basket of six major currencies. The euro added to Tuesday's 1 percent gain, rising 0.3 percent to around $1.3121, inching closer to a one-week high of $1.3132 touched on Tuesday.
The Nikkei stock average increased 1.4 percent, following a rally in global and U.S. stocks on Tuesday.
Global stocks climbed 2.3 percent for their strongest gains in three weeks.
EUROPE FUNDING STRAINS
Strong demand for 3- and 6-month Spanish Treasury bills on Tuesday heightened expectations for the ECB's first ever three-year tender to be conducted later on Wednesday, aimed at easing interbank lending strains.
A significant uptake is all but guaranteed and that's something that could continue this 'risk-on' (mood), said Robert Rennie, chief currency strategist at Westpac in Sydney.
A plunge in Spanish treasury bill yields from a month ago eased fears that the borrowing costs for highly-indebted countries would remain extremely high as concerns persist over slow progress in resolving the euro zone debt crisis.
Sources reported more than 10 Italian banks, including major lenders, were looking to apply for the ECB loans by using state-guaranteed bonds as collateral.
But Rennie warned: That optimism will quickly fizzle out as the ECB is still a long way from embracing quantitative easing.
Analysts say the long-term ECB loans will lower the cost for euro zone banks to borrow euros in the open market, but won't reduce their dollar funding costs.
The benchmark London interbank offered rate for three-month dollars rose on Tuesday to 0.56975 percent, the highest level since July 2009.
Hopes banks will use the borrowed money from the ECB to purchase high-yielding debt lowered 10-year Italian and Spanish government bond yields to 6.632 percent and 5.127 percent respectively, further away from the levels above 7 percent that were widely seen as unsustainable.
But it was more likely that the banks would use the funds to repay their own debts as they strive to get rid of bad assets and improve their balance sheets amid strong regulatory pressures to beef up their core capital.
Fading risk aversion helped improve sentiment in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by 4 basis points on Wednesday.
Bank of Japan data on Wednesday underscored how investors fled to safety in the third quarter, when European leaders faced intense market pressures to resolve the crisis. Foreign holdings of Japanese government bonds in the period posted a record year-on-year growth of 30.7 percent to 76 trillion yen (623 billion pounds).
(Additional reporting by Cecile Lefort in Sydney; Editing by Alex Richardson)