Stabilising risk appetite lifted Asian shares and riskier currencies on Wednesday, after firm demand at Spanish debt sales, positive U.S. corporate earnings, and an improved sentiment in a Germany survey boosted investor confidence.
Following a rally in European equities and U.S. stocks scoring their biggest gain in a month the previous day, MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> edged up 0.5 percent on Wednesday.
Japan's Nikkei average <.N225> was 1.5 percent higher. <.T>
Risk appetite has come back, said Takashi Hiroki, chief strategist at Monex Inc. The results of Spanish short-term auction were good. Corporate earnings in the U.S. have met or beat market forecasts.
Spain sold a more-than-planned 3.2 billion euros (2.64 billion pounds) of 12- and 18-month bills on Tuesday due to good demand from domestic banks, easing some concerns about the country's refinancing ability. Yields rose sharply as expected.
Yields on 10-year Spanish government bonds fell back below the 6 percent level reached on Monday when concerns over the banking system, deficit and recession flared up.
Spain faces a far more significant challenge on Thursday, when it tests investor demand in an auction of two- and 10-year bonds.
The euro edged up 0.1 percent at $1.3136, recovering from a two-month low near $1.2994 hit on Monday, bringing the single currency back in the middle of its recent trading range. Riskier currencies such as the Australian dollar was up 0.1 percent to $1.0404 as investor appetite returned.
The combination of mounting challenges to Spain's ambitious deficit-reduction efforts, returning risk-aversion ahead of a potentially-hawkish surprise at the April 25 FOMC and softening signals from Beijing could build sufficient buying momentum in the US dollar at the expense of the euro, said Ashraf Laidi, chief global strategist at City Index Group.
Asian credit markets firmed slightly, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by about 3 basis points early on Wednesday.
Oil held gains, with U.S. crude futures inching up 0.1 percent to $104.29 a barrel. Brent crude settled up 10 cents at $118.78 a barrel on Tuesday.
Other news that helped turn around bearish sentiment on Tuesday included a German ZEW survey of analyst and investor confidence rising unexpectedly in April to its highest level since June 2010, suggesting Europe's largest economy may be recovering from a weak spell.
The International Monetary Fund offered a cautiously optimistic view on global growth, which it said is slowly improving as the U.S. recovery gains traction and dangers from Europe recede. But it said on Tuesday risks remain high and the situation is very fragile.
While the IMF said it saw Spain growing 0.1 percent in 2013 after forecasting in January a 0.3 percent contraction for next year, the IMF also warned it did not see Spain meeting its deficit goals this year or next.
Europe is seeking to bolster its fragile safety net as highly indebted euro zone nations struggle to implement fiscal austerity measures, with a differences developing over the allocation of funds from the euro zone's rescue fund.
The Sueddeutsche Zeitung daily said on Wednesday several euro zone countries and some officials of the European Central Bank were pressing for the European Financial Stability Facility to be able to lend directly to troubled banks without going through the government of the country concerned.
But the main donor nations to the EFSF, above all Germany, remained strongly opposed to any measures they regard as relaxing pressure on euro zone governments to tackle structural problems.
(Additional reporting by Dominic Lau in Tokyo; Editing by Eric Meijer)