Asian shares rose to fresh two-month highs on Friday as solid euro zone sovereign debt sales and signs that Greece may be nearing a vital debt-swap deal eased concerns over Europe's refinancing capability, boosting appetite for riskier assets.
Upbeat earnings from more U.S. banks and further data confirming the U.S. economy is on a recovery track also helped underpin sentiment, which has been improving since the start of the year.
But a sluggish Chinese purchasing managers' survey for January reminded investors of the impact that the euro zone debt crisis is having on the global economy, and the risk of further shocks emanating from Europe.
The MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose as much as 0.7 percent to their highest in more than two months for a third weekly gain and a fourth straight session of increases.
It has gained about 7.5 percent so far this year.
Japan's Nikkei average <.N225> hit an 11-week high, ending up 1.5 percent on the back of Thursday's rally in U.S. stocks, which was triggered by better-than-expected results from Morgan Stanley
Financial spreadbetters expected Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> to open flat to 0.2 percent lower. U.S. stock futures were little changed.
Chinese shares and commodities rose, shrugging off the HSBC flash manufacturing purchasing managers index (PMI), the earliest indicator of China's industrial activity, which stood nearly steady at 48.8 in January from 48.7 in December.
The index staying below the 50 level that demarcates expansion from contraction suggested China will keep policy options open to spur growth.
Activity will likely slow when many Asian markets will be closed entirely or partially next week for the Lunar New Year holiday.
The relief of worries in the euro zone and the liquidity boost from the European Central Bank's cheap loans have spurred a lot of buying, said Rhoo Yong-suk, an analyst at Hyundai Securities.
On Thursday, Spain sold more longer-term debt than hoped, while France raised funds at yields lower than previous auctions. This followed a strong treasury bill sale from Portugal, the only euro zone country apart from Greece that is given junk status by all the major rating agencies.
This week's auctions were key to testing investor confidence for euro zone bonds, following Standard & Poor's mass credit rating downgrades last Friday which knocked France down from a top-notch rating.
SIGNS OF STABILITY
Encouraging signs continue to emerge from the United States, with data on Thursday showing the number of Americans filing for new jobless benefits dropped to an almost four-year low last week, and factory activity in the mid-Atlantic expanded moderately.
Market uncertainty has declined substantially in the past few days, with various implied volatility measures across assets falling to levels last seen in late July/early August 2011, analysts at Barclays Capital said in a research note.
Better economic data, progress in the Greek negotiations and successful peripheral European bond auctions have bolstered market sentiment for the time being, they said.
The CBOE Volatility index VIX <.VIX>, which measures expected volatility in the S&P 500 over the next 30 days, however near a six-month low of around 19.87, reflecting a stabilising market and waning investor desire to seek protection in stock index options against future losses.
The euro moved further away from a near one-and-a-half-year low hit last week, with the ECB's generous funding into the system helping to push euro zone bank-to-bank lending rates down to new 10-month lows on Thursday and soothing fears of an imminent credit crunch in Europe.
The euro steadied at $1.2975, a two-week high, Friday, according to trading platform EBS.
Greece and its private bondholders resume debt-swap talks on Friday as they aim to overcome differences on interest payment that Athens must offer on its new bonds under the deal. Clinching the debt-swap deal is crucial for Greece to avoid a messy default.
I suppose markets will look for any sign that the talks are progressing today to help to sustain the rally in euro, said
Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
Recovering global demand for credit was strengthened the Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by 6 basis points.
(Additional reporting by Joonhee Yu in Seoul and Masayuki Kitano in Singapore; Editing by Kim Coghill)