Asian stocks stabilized on Tuesday, helped by technology shares, while a steady euro kept investors for now from cutting their exposure to risks further in the face of default threats in the United States and Europe.
However, risky assets may be on borrowed time.
With the clock ticking in Washington before an August 2 deadline on the federal borrowing limit, political leaders were still at an impasse. Europe also appeared no closer to sealing a deal for a second bailout of Greece ahead of Thursday's European Union summit.
Investors for the most part appear to be assuming that the U.S. debt ceiling will be lifted and a default averted, with the 10-year Treasury yield camped comfortably below 3 percent, but stakes are running high in the euro zone.
Italian and Spanish 10-year bond yields rose above 6 percent on Monday in the wake of stress tests on the region's banks, pulling further away from German Bunds and reflecting a low degree of confidence that policymakers can contain the crises. Funding costs are perceived to be unsustainable if yields rise over 7 percent.
There is rising risk that disappointment at the EU Summit (21st July) on the absence of support measures for Spain and Italy will see the crisis worsen. This is our base case scenario, given that Europe will deal with Greece more than one year too late, Royal Bank of Scotland strategists said in a note.
Japan's Nikkei share average was down 0.8 percent <.N225>, well off a four-month high hit on July 8. Markets in Tokyo had been closed on Monday for a holiday.
Foreigners are selling mega banks and buying defensive names like NTT, said a trader at a European brokerage, referring to a telecom company.
China's benchmark stock indexes were down across the board after the Shanghai composite hit a two-month high on Monday.
Some investors were on the prowl though for value in Chinese equities, where uncertainties about high municipal debt and a second-half slowdown in China's economy have made valuations shrink.
Khiem Do, head of multi-asset group at Barings Asset Management in Hong Kong, told Reuters Television that Chinese bank stocks were what he considers a hidden gem being overlooked by markets.
Investors should be buying them and other cyclical stocks versus defensive names, Do said.
Australia's benchmark stock index was down flat <.AXJO> after earlier hitting a 10-month intraday low.
Shares of News Corp listed in Sydney were up 2.8 percent
The company said it is fully behind current CEO Rupert Murdoch.
The MSCI index of Asia Pacific shares outside Japan initially ticked up 0.2 percent <.MIAPJ0000PUS>, helped by the technology sector, after IBM
But then that index slipped to be off 0.1 percent.
Hopes may also be running high ahead of Apple Inc's
The euro was up against the dollar a touch at $1.4126, and down 0.1 percent against the Swiss franc at 1.1520 francs.
The franc has been a big winner in the past few months, serving as a haven along with gold from fiscally weak G10 countries. Though the rapid move into the Swiss franc has cooled, widening Italian and Spanish bond yield spreads over Bunds will likely trigger fresh selling of euro/Swiss franc.
Deutsche Bank found that a basket trade that is short the dollar, sterling, yen and the euro -- that is, and long the rest of the G10 currencies -- has annual excess returns of 8.1 percent so far this year.
Precious metals have also been a beneficiary of investors seeking hard assets as debt crises in Europe and the United States grow. Spot gold edged lower 0.1 percent to $1,601.86 an ounce in early Asian trade, off the record high of $1,607.01 reached on Monday.
Silver has been catching up lately with gold's advance, though was nearly flat on Tuesday, at $40.48 an ounce, off Monday's high of $40.70 -- its highest since May 4.
(Editing by Richard Borsuk)