Asian stocks gained on Monday after a deal that moves Europe closer to fiscal union encouraged investors to take on more risk, but the euro fell amid concerns the euro zone's fragile safety net is still insufficient to prevent its sovereign debt crisis from spreading.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose as much as 1.4 percent on Monday, after sliding as much as 2.8 percent on Friday for a weekly drop of 3.5 percent on concerns over the EU summit's outcome. Japan's Nikkei stock average <.N225> gained 1.5 percent.
Financial spreadbetters predicted Britain's FTSE 100 <.FTSE> would open up around 0.2 percent.
Asian credit markets firmed on weakening risk aversion, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by 7 basis points in thin volume.
Twenty-six of the 27 European Union leaders on Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to 200 billion euros (171 billion pounds) in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.
There was some progress made in Europe, such as having an accord on funding, which helps negative sentiment to recede and risk-on mood to return, said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.
But the euro, weighed by widespread views that the region's debt woes were far from being resolved, fell 0.4 percent to a session low $1.3335 after Moody's said it expected to reassess euro zone sovereign ratings in the first quarter of 2012. The dollar rose 0.2 percent against a basket of six major currencies. <.DXY>
There is a lot of scepticism whether the euro zone plan can be implemented in March. There is huge deleveraging ahead in Europe. China is clearly slowing down; there are some serious headwinds for equities, said IG Markets institutional dealer Chris Weston.
Markets returned their focus to the slowing global economy.
The Shanghai Composite Index <.SSEC> slipped to the lowest level since April 2009 in thin trade, with investors jittery over a possible policy response from Beijing after data last week pointed to a serious risk of a sharp industrial slowdown.
Gold slipped more than 1 percent on technical selling and on a 0.2 percent rise in the dollar index. Spot gold fell as much as 1.5 percent to a two-week low of $1,684.19 an ounce.
While bilateral loans to the IMF agreed at the EU summit would beef up its resources to help struggling euro zone economies when needed, the volume at the euro zone's bailout fund was still seen insufficient to safeguard core euro zone economies from the contagion of the debt crisis.
The capacity of a permanent bailout fund was capped and it was not granted a banking licence.
That will keep intense pressure on the European Central Bank to take on a role as lender of the last resort, aimed at thawing a harsh credit contraction in the euro zone.
Near-term, there remains inadequate firepower to backstop large euro-area sovereigns; we expect that a reluctant ECB will eventually have to adopt this role, Standard Chartered wrote in a note to clients.
Until the funding scheme is strengthened further, financial strains will persist, as worries about banks' exposure to euro zone sovereign bonds have made them reluctant to lend dollars to each other.
Banks, pressed to beef-up their capital hit by plunging euro zone bond prices, could face additional pressure this week as rating agency Standard & Poor's will follow up on its decision after placing all euro zone sovereigns on creditwatch negative.
Debt yields of highly-indebted countries such as Italy and Spain stayed vulnerable, barely contained by ECB buying in the secondary market. Italy and Spain are set to issue new debt this week and their borrowing costs are likely to continue to rise.
Rising borrowing costs will make it difficult to pursue fiscal discipline, while preoccupation on fiscal health could undermine policies to stimulate growth.
(Additional reporting by Victoria Thieberger; Editing by Alex Richardson)