China's bank stocks bounced on Thursday on hopes of a near-term pause in policy tightening, keeping regional shares close to a one-month high, while the euro steadied before a widely expected rate hike from the European Central Bank later.
Sovereign debt was still very much on the radar of global investors, though Wall Street finished higher overnight, as investors looked beyond the latest bout of nervousness over the euro zone debt crisis after Moody's slash in Portugal's ratings sparked a selloff in peripheral bonds.
The sharp drop in the bonds of Portugal and Greece came just a week after investors had breathed a sigh of relief that Greece had passed tough austerity measures needed to win a near-term bailout, thereby avoiding a default.
The march higher in the bond yields of high-risk Europe and the recent credit rating actions have raised the stakes for ECB President Jean-Claude Trichet and keep exposing the euro's biggest vulnerability. The central bank will probably lift rates for a second time this year to 1.5 percent but then step back for a few months as it battles with the debt crisis and struggles to avoid an outright default by a member country.
If Trichet's comments just underline expectations of gradual tightening in the future, the market may be disappointed and sell the euro, said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank in Tokyo.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.4 percent in early trade, near a one-month high reached on Monday that has been difficult to retest all week.
Gains were spread evenly across the financials, industrials and consumer-oriented stocks, while the technology sector was the only one in the red, pulled down by a 1.6 percent fall in shares of Samsung Electronics <005930.KS>.
Quarterly profit at Samsung, the world's largest maker of memory chips and televisions and a big favorite of foreign fund managers wanting exposure to the Asian tech sector, fell 26 percent, hurt by weak earnings at its flat screen unit.
Bank and insurer shares helped lead gains in Hong Kong as investors judged that the People's Bank of China is getting closer to taking a break from its multiple increases in policy rates and bank reserve requirements as the economy shows signs of losing steam.
The Hang Seng index <.HSI> edged up 0.7 percent, while the Hang Seng China Enterprises index of mainland stocks listed in Hong Kong led the region with gains of 0.9 percent <.HSCE>.
Japan's Nikkei average <.N225> was roughly unchanged on the day, at risk of ending a 7-day rally that pushed the index back to where it was right after March's devastating earthquake and tsunami.
OPTIONS TO AVERT U.S. DEFAULT
The euro was trading at $1.4323, smack in the middle of a range held over the past two months.
It could be indeed vulnerable should the ECB strike a dovish note later after a policy meeting or if the debt crisis brings countries such as Greece and Portugal closer to default.
However, the possibility of a U.S. debt default has loomed over the dollar as well and helped to keep the euro in a relatively tight trading range against the dollar for the past few months.
Reflecting how critical the issue of U.S. debt ceiling has become, top Treasury officials have been secretly exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters.
The Australian dollar jumped 0.4 percent against the dollar at $1.0736 after data showed a robust increase in June employment showed the economy was holding up well despite recent reports showing households becoming more cautious on spending.
Gold prices were little changed at $1,530.64 an ounce, while U.S. crude oil was up 70 cents to $97.35 a barrel.
(Additional reporting by Hideyuki Sano in TOKYO; Editing by Richard Borsuk)