Asian stocks and the euro rose on Wednesday after upbeat U.S. and German data and strong demand for Spanish debt, with investors' focus turning to a European Central Bank's tender as a gauge for euro zone funding strains.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.1 percent, recovering about half of its losses posted on Monday after 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 Nikkei stock average opened up 1.3 percent, following a rally in global and U.S. stocks on Tuesday. <.T>
Global stocks <.MIWD00000PUS> climbed 2.3 percent for their strongest gains in three weeks on firm German business sentiment and signs of a recovery in the U.S. housing market.
Wall Street stocks jumped nearly 3 percent, led by banks, after the Federal Reserve's new capital proposals turned out to be less worrying than feared.
Strong demand for 3- and 6-month Spanish Treasury bills pushed the yields sharply down from a month ago, helping to ease 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.
Further adding to positive sentiment were expectations for the ECB's first ever three-year tender to be conducted later on Wednesday, aimed at easing the 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.
The euro inched up 0.2 percent to $1.3110 on Wednesday. The single currency rose 0.6 percent on Tuesday for its best day since November 30, reaching a one-week high of $1.3132 and moving away from an 11-month low of $1.2944 hit last week.
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 above 7 percent level 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.
Industrial metals such as oil and copper rose on Tuesday on supportive economic data, while gold rose to a one-week high on the back of the euro's 1 percent rise against the dollar.
Oil prices posted their biggest percentage rise since October on Tuesday and copper reached near a one-week high.
European Union leaders will meet on January 30 to try to make further progress towards the region's fiscal consolidation, as agreed at a summit meeting earlier this month. The leaders will negotiate the intergovernmental agreement to tighten fiscal controls and sanctions in the euro zone.
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.
(Additional reporting by Cecile Lefort in Sydney; Editing by Alex Richardson)