Asian shares and the euro gained on Wednesday on hopes that the threat of mass credit rating downgrades will pressure European leaders to come up with a convincing framework for resolving the euro zone debt crisis at a crucial summit later this week.
European shares were expected to resume their brisk 1-1/2 week rally, interrupted on Tuesday, and S&P 500 futures pointed to a firmer start on Wall Street.
Standard & Poor's, which on Monday told 15 euro zone member nations that it may cut their debt ratings, fired a second shot less than 24 hours later, threatening on Tuesday to cut the credit rating of Europe's financial rescue fund.
The rating action weighed on stocks initially, but sentiment improved after the Financial Times reported that European leaders would discuss boosting the firepower of the euro zone bailout fund, a move crucial to effectively containing the contagion of the crisis to bond markets.
People are more optimistic that the news out of the December 9 meeting would be more upbeat, so it's a bit of a reaction to that, said Guy Stear, head of research with Societe Generale in Hong Kong, adding that the markets were in a technical bounce from yesterday's moves.
MSCI's broadest index of Asia Pacific shares outside Japan rose 1 percent, while the Nikkei stock average added 1.7 percent.
Financial spreadbetters predicted the FTSE 100 to open as much as 0.4 percent higher, Germany's DAX to gain as much as 0.7 percent and France's CAC-40 to rise as much as 0.5 percent.
The euro inched up 0.2 percent to $1.3420, off its one-week low near $1.3330 touched on Tuesday, with guarded optimism ahead of the European Union summit on Friday and the European Central Bank's policy meeting on Thursday.
Market players expect the central bank to announce a rate cut as well as expanded liquidity measures to ease strains in the banking system.
Until the EU summit the risk is to the upside on hopes for a European breakthrough, said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.
In the latest evidence of the euro zone debt crisis affecting the global economy, a Reuters poll on Wednesday showed Japan's manufacturers turned pessimistic for the first time in six months, boding ill for the fragile recovery from a devastating earthquake and tsunami in March.
Annual export growth rate in China, a big exporter to Europe, slowed in November from October and it will face a severe export situation in 2012, officials said. China is due to release its November trade data on Saturday.
EUROPE MAKING PROGRESS
European leaders are striving to forge an agreement at their summit to enforce fiscal discipline, and France and Germany want to change EU rules to impose penalties on states that exceed deficit targets -- both measures aimed at staving off further market attacks on highly indebted and vulnerable economies.
European Council President Herman Van Rompuy, who will chair the EU summit, said tighter budget oversight sought by Paris and Berlin could be achieved quickly with only minor tweaks to EU treaties, raising hopes for a swift implementation of the measure to help restore market confidence.
There also appeared to have been some progress on bolstering the firepower of the region's rescue fund, some 40 percent of which has already been committed to bail out Greece, Ireland and Portugal.
Euro zone officials said the leaders may decide on Friday to raise the combined lending limit of their temporary and permanent bailout funds.
Guarded optimism helped firm Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing marginally, while risk sensitive oil and copper eked out gains.
Brent crude steadied above $110 and U.S. crude nudged up 0.2 percent. Copper rose 0.7 percent to $7,886.50 a tonne and gold also edged up 0.1 percent.
A lot of short positions are being taken off before the event but no one is really putting on risk. Eyes will remain on headlines, said a Singapore-based trader with an Asian bank
(Additional reporting by Jongwoo Cheon in Singapore and Umesh Desai in Hong Kong; Editing by Alex Richardson)