Asian shares, euro gain on U.S. earnings, Spain hopes

Asian shares rose to their highest in over five months on Wednesday as strong U.S. earnings reports lifted investor mood, while the euro hit a one-month high against the dollar as Spain retained an investment-grade debt rating.

Growing risk tolerance weighed on the safe-haven dollar, pushing its index measured against a basket of six key currencies to a 1-1/2-week low while underpinning dollar-based commodities and the commodity-linked Australian dollar.

A weaker dollar also lifted spot gold up 0.3 percent to $1,752.14 an ounce, off their one-month lows seen on Monday.

The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> jumped as much as 1 percent to a 5-1/2 month peak, and was last up 0.8 percent.

The materials sector <.MIAPJMT00PUS> led the gains, buoying resources-reliant Australian shares as much as 0.9 percent to 15-month highs.

"We're in one of those situations where there's a lot of cash packed on the sidelines looking for significant pullbacks to get in," said Ric Spooner, a market strategist at CMC Markets, of the Australian equities.

Japan's Nikkei average <.N225> gained 1.3 percent to a one-week high as investors scooped up stocks cheapened by a recent selling that sank the index to a 2-1/2 month low, while a generally weakening yen supported exporters.

"Consensus cooled down quite a lot and now people are realizing it might have gone too far," said Masayuki Otani, chief market analyst at Securities Japan, referring to last week's sell-off on expectations for poor earnings.

U.S. stocks rose on Tuesday as big-name companies reported stronger-than-expected earnings, with Johnson & Johnson and UnitedHealth Group both increasing their full-year profit forecasts while Goldman Sachs raised its dividend.

Investor sentiment also improved and supported the euro on talk of European Union aid for Spain and a closely-watched monthly survey from the ZEW institute on Tuesday that showed a better-than-expected improvement in investor confidence in Germany, the euro zone's largest economy and growth engine.

The euro received additional boost and rose to its highest since September 17 of $1.3125 after rating agency Moody's Investors Service on Tuesday affirmed its investment grade sovereign rating of Baa3 on Spain, easing fears about Madrid's ability to manage its huge public debt.

Moody's cited the willingness of the European Central Bank to undertake outright purchases of Spanish government bonds and the Spanish government's continued commitment to implement fiscal and structural reforms. But it assigned a negative outlook because "the risks to its baseline scenario are high and skewed to the downside." [ID:nWNA7687]

A senior German lawmaker said on Tuesday that a media report on the Spanish government applying for a precautionary credit line had "overinterpreted" comments he made on the issue and that he had not been referring to Spain.

"Relief is probably a good way of describing it. You also get a sense that something is happening on the Spanish bailout story as well ... and markets generally like that," said Robert Rennie, chief currency strategist at Westpac Bank.

CAUTION WARRANTED

Some analysts questioned the jump in the euro and said it was merely due to short covering, as many market players remain wary of completely unwinding their bearish stance on the single currency, given highly uncertain prospects for the three-year euro zone debt crisis to be resolved decisively anytime in the near future.

"People seem to forget that the fact Moody's assigned a negative outlook means there is risk that Spain's rating may be downgraded to junk if economic deteriorations threaten Moody's baseline scenario," said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.

Karakama also said the current low implied volatility for the euro/dollar was worrying as low volatilities have in the past preceded a sharp decline. He expected the euro to test a key technical support of its 200-day moving average which now stood just above $1.28.

The dollar eased 0.2 percent against the yen at 78.68, retreating from Tuesday's one-month high of 78.97 yen.

U.S. President Barack Obama and Republican rival Mitt Romney clashed repeatedly on jobs, energy and Libya in their second debate on Tuesday, with Obama moving aggressively to challenge his opponent.

Market reactions in Asia have been muted but U.S. investors will likely focus on the outcome.

"In theory it matters because it determines (Federal Reserve Chairman Ben) Bernanke's tenure and the odds of corporate friendly policy such as a home repatriation act. In practice, it matters because the financial industry seems to have been pushed to one side of the debate, impacting its confidence," Societe Generale analysts said in a research note.

U.S. crude futures inched up 0.1 percent to $92.18 a barrel but Brent edged down 0.1 percent at $113.84.

Asian credit markets firmed, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 5 basis points.

(Additional reporting by Ian Chua in Sydney, Sophie Knight in Tokyo and Maggie Lu Yueyang; Editing by Eric Meijer)