Japanese stocks struck a four-month closing high on Friday and higher-yielding currencies held gains as investors favored riskier assets, with improvements in Chinese manufacturing and South Korean exports adding to evidence of a global economy on the mend.
Many markets in Asia and Europe were closed for labor day holidays, but British and U.S. markets will be open. The FTSE 100 <.FTSE> was expected to slip about 1 percent at the open, according to financial bookmakers.
Stock markets around the world have surged this week on mounting confidence the global economy is starting to pull out of a deep recession sparked by the financial crisis, especially with the hard-hit U.S. economy showing signs of bottoming out.
A slower-than-expected drop in South Korean exports in April and signs of U.S. regional manufacturing activity picking up all pointed to the risk of an upside surprise in figures from the U.S. Institute for Supply Management's factory survey for April.
The ISM index, due to be released later on Friday, is widely seen as a solid leading indicator for U.S. and global activity.
But some analysts remained cautious and said investors may be getting ahead of themselves given the still shaky state of financial markets.
The news out there is much less worse than it's been, but that doesn't mean everything is fixed, said Lucinda Chan, division director at Macquarie Equities in Sydney. The green shoots theory is happening out there, but it's slow and steady.
Japan's Nikkei average <.N225> rose 1.7 percent despite more bleak data showing the economy slipping back into deflation and unemployment rising at a record pace in March to a four-year high.
But the MSCI index of Asia-Pacific shares <.MIAPJ0000PUS> outside Japan dipped 0.2 percent and pulled back from a six-month high, mainly on a slight drop in Australian shares <.AXJO>. Most markets included in the index were closed.
In April, the MSCI Asia-Pacific ex-Japan soared 14.6 percent -- its biggest monthly gain in a decade. The MSCI index of world stocks <.MIWD00000PUS> posted its biggest monthly increase ever in its two-decade history last month.
Corporate news also helped boost confidence. Shares of Canon <7751.T>, the world's largest digital camera maker, jumped 6.1 percent after it lifted its annual outlook.
Japanese shipping companies <.ISHIP.T> gained 5 percent on the brightening outlook for global trade. Nippon Yusen KK <9101.T>, Japan's biggest ocean shipping company, gained 4.7 percent.
Chrysler's bankruptcy filing and the spread of influenza A, known as swine flu, did little to stem the budding optimism about global growth.
Some analysts have said that the equity rally, led by a sharp rebound in Asian markets, may have more room to run because investors had been so pessimistic about the outlook and many are still hoarding funds in cash.
From the lows hit two months ago, the benchmark MSCI index of Asian shares has surged as much as 40 percent -- taking it into bull market territory.
The stock market gains have spurred selling of safe-haven government bonds and driven U.S. Treasury yields to their highest in five months, threatening to undercut the Federal Reserve's efforts to keep a lid on interest rates by buying bonds.
Benchmark 10-year Treasuries dipped 1/32 in price to yield 3.119 percent, little changed from late U.S. trade and keeping the two-year/10-year yield curve near its steepest levels since November.
But Japanese government bonds bucked the stock market gains and pushed higher as investors took advantage of the rise in yields to allocate funds. Benchmark 10-year JGB yields edged down 2.5 basis points to 1.395 percent.
Trading in currencies was subdued. The dollar edged up 0.4 percent to 99.00 yen, while the Australian dollar was up 1 percent at 72.20 yen and 0.5 percent at $0.7290.
When risk appetite improves, market players use the yen -- still the lowest yielding of major currencies -- as a source of funds to buy higher-yielding currencies in the carry trade.
Improving confidence among Japanese investors has also prompted them to start shifting more funds abroad in search of higher returns -- even via U.S. junk bonds.
This confidence is spreading in the equity markets and risk appetite is growing more and more. As a result the yen is being sold broadly, said Toru Umemoto, chief FX strategist Japan at Barclays Capital in Tokyo.
(Additional reporting by Miranda Maxwell in Melbourne and Charlotte Cooper in Tokyo; Editing by Neil Fullick)