European stock index futures jumped on Wednesday, tracking a rise in Asian shares, but a cut to Spain's sovereign credit rating from Moody's Investors Service kept investors' risk appetite in check.
Gains for U.S. stocks and a report that Europe will strengthen the region's rescue fund helped improve sentiment, with spreads over a key Asian credit default swaps index narrowing several basis points.
But bearish technicals remained in place to suggest investors were still wary about buying riskier assets.
It's a familiar pattern these days, to sell stocks whenever there's bad news from Europe and buy them back whenever there's good news, but investors are getting tired of it, said Kenichi Hirano, operating officer at Tachibana Securities, adding that this was one reason for recent thin trade.
Euro STOXX 50 index futures rose 1.3 percent. Futures for Germany's DAX and France's CAC-40 also rose around 1 percent, while financial spreadbetters called the FTSE 100 <.FTSE> to open as much as 1.1 percent higher. <.EU> <.L>
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.5 percent.
The technology sector <.MIAPJIT00PUS> recouped earlier losses and gained 0.7 percent, but lagged the wider market as sentiment was weighed down by disappointing earnings results from the world's largest technology company, Apple Inc
Apple shares lost more than 5 percent to fall below $400 in extended trade after the company reported a rare miss in quarterly results as sales of its flagship iPhone fell short of Wall Street expectations.
The Nikkei stock average <.N225> rose 0.4 percent but Apple's results helped cap the upside. <.T>
European debt woes continued to undermine investor sentiment as they remained cautious about the degree of progress policymakers would offer at a summit on Sunday.
German Chancellor Angela Merkel said Sunday's meeting would be an important step, but warned one summit would not be enough to resolve the crisis, while the EU's trade chief said the euro zone could unravel unless tough action was taken.
A report on Tuesday in Britain's Guardian newspaper that France and Germany had agreed to boost the firepower of a euro zone financial rescue fund to 2 trillion euros was later denied by a senior euro zone source, who told Reuters there had been no mention of such a deal.
Stocks are moving entirely on European politics. The question is can Europe really come up with something, a positive surprise for the market? HSBC's Evans said of the October 23 meeting, adding that Wednesday's rise was mainly driven by laggard buyers who missed the rally last week.
Evans said the key issues were how big a cut to Greece's debt was agreed, the need for a major recapitalization for European banks and a big increase to the bailout facility, and if the markets felt the outcome fell short of their expectations stocks could re-test the lows marked earlier this month.
Moody's, one of the big three ratings agencies, on Tuesday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stresses.
The latest step followed Moody's warning on Monday over risks for France to maintaining its top credit rating.
U.S. banks' earnings underscored the damage inflicted by the global financial turmoil, with Goldman Sachs Group Inc
Bank of America Corp
In Asian credit markets, spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, narrowed by about 10 basis points, reflecting a rise in equities.
Demand for safe-haven government bonds also eased, with U.S. 10-year Treasury note futures inching lower in Asia on Wednesday in light trade, as investors stayed sidelined to see what steps Europe would take to resolve its sovereign debt crisis.
The market feels a little better following the late rally in equities. But right now, it's all about headline watching from Europe. We are also watching the last of the Wall Street bank earnings today with Morgan Stanley's results due later, said a Singapore based trader with an Asian bank.
Lingering uncertainty over Europe's debt crisis and its adverse impact to banks' financial strength has left money markets under strain, giving incentives for some to take preemptive measures to avoid a funding crunch.
South Korea and Japan agreed to expand their currency swap arrangements more than five-fold on Wednesday, saying global economic uncertainty was deepening and that sufficient pre-emptive arrangements were needed.
The won extended gains after the agreement, while short-term speculators added more exposure in emerging Asian currencies on the euro's rebound.
The euro recovered earlier losses made on Moody's downgrade of Spain and rose 0.5 percent to above $1.38, which pushed the dollar index <.DXY>, which measures the U.S. currency against six major currencies <.DXY>, down further.
Gold, traditionally a safe-haven asset, eased 1 percent in the last two sessions, reviving an inverse correlation to the dollar. The dollar's fall on Wednesday was gold's gain, with spot gold recovering from earlier losses to rise 0.2 percent.
(Additional reporting by Lisa Twaronite in Tokyo, Umesh Desai in Hong Kong; Editing by Alex Richardson)