Asian shares rose to a one-month high and the euro clung near its strongest in a week on Friday as strong demand in Spanish and Italian debt sales tempered risk aversion ahead of another auction from Rome later in the day.
Interbank lending rates fell in a sign that worries about a credit crunch may be easing, while Asian credit markets firmed, with primary market activity picking up.
Greater appetite for risk weighed on safe haven gold, pushing it down 0.6 percent to near $1,640 an ounce after it hit a one-month high on Thursday, but oil recovered from a sell-off in the previous session on a report that a proposed European Union embargo on Iranian crude imports would be delayed.
The tide may turn around soon from extreme pessimism seen last year as people become less convinced the euro zone debt crisis would devastate global growth and wonder if it isn't time to start thinking positively, said Tetsu Emori, a fund manager with Astramax Co. in Tokyo.
Sentiment drives markets, so if more people become bullish, prices, particularly in equities and commodities, will rise. It's now just a matter of when you make the switch.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose as much as 0.7 percent to its highest since December 8, poised for a second weekly gain. Japan's Nikkei average <.N225> rose 1.4 percent, drawing support from U.S. stocks. <.T>
European shares were likely to rise, with financial spreadbetters forecasting Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> to climb around 0.4-0.7 percent.
The euro was up 0.1 percent to $1.2835, inching closer to a one-week high of $1.2846 hit on Thursday.
In a closely watched test of investor confidence, Spain sold double the targeted amount at its auction of a new three-year bond and two existing bonds maturing in 2016, while yields halved at an Italian T-bill sale on Thursday.
The successful sales raised hopes for a similarly positive result when Italy sells up to 4.75 billion euros of longer-dated bonds later on Friday.
European Central Bank President Mario Draghi said that, while the bank's massive injection of euros into the euro zone banking system in December had helped avoid a credit crunch, there was still scope for further interest rates cuts, lending additional support to market sentiment.
The outlook for equities and fixed-income assets in Asia is positive, given the region's low inflation, low debt, generally sound budget and healthy corporate balance sheets due to either abundant cash at hand or a low level of leverage, said Bill Maldonado, chief investment officer, Asia-Pacific, at HSBC Global Asset Management.
Asian equities are cheap. The valuation level is attractive and the level of profitability is also very appealing, he told a seminar in Tokyo.
Most emerging Asian currencies rose on Friday, and are expected to get further support as more funds including real money investors are likely to keep buying them on the region's stronger economic and fiscal fundamentals.
Equities are doing well. Data in Asia will turn higher and the euro sentiment is stabilising somewhat. All that equals higher Asian currencies, said Jonathan Cavenagh, a foreign exchange strategist for Westpac in Singapore.
But positive news were met with worries about talks breaking down on a second bailout for deeply indebted Greece, as well as weaker U.S. retail sales and rising claims for jobless benefits, which reminded investors of the fragility of the U.S. recovery.
Contrarian sentiment indicators suggest that investor optimism may have reached stretched levels and be more vulnerable to negative headline news in the near-term, analysts at Barclays Capital said in research note.
Interbank lending costs fell on Thursday as the successful debt auctions eased fears of an impending meltdown in the financial system, and there are signs returning stability due to the ample liquidity is encouraging issuers to tap markets.
Issuance of covered bonds, which are backed by assets that would be used to repay holders if a bank defaults, has risen in Europe in early 2012.
Spreads on the iTraxx Asia ex-Japan investment grade index tightened by 7 basis points on Friday on improving risk sentiment, also partly lifted by a strong performance from newly minted bonds from Korea Gas.
(Additional reporting by Umesh Desai in Hong Kong and Jongwoo Cheon in Singapore)