Asian shares rose on Tuesday as investor sentiment improved thanks to an overnight rally in U.S. stocks that was fuelled by better than expected earnings from Citigroup Inc , the third-largest U.S. bank, and above forecast retail sales data.
Investors held onto hopes that Spain will ask for a bailout in coming weeks to activate the European Central Bank's bond buying scheme, and Greece would eventually bridge the gap on its austerity measures with its lenders, to ease fears that Athens will leave the euro zone.
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Few, however, believed anything concrete will be finalised at the European Union leaders' meeting on Thursday and Friday, and the uncertainty on the timing of bailouts for struggling Spain and Greece limited the euro's gain to a 0.1 percent rise against the dollar at $1.2962.
There was also some caution before China publishes third-quarter gross domestic product data on Thursday, as Chinese corporate profits show scant sign of a second-half recovery.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.6 percent.
Australian shares climbed 0.7 percent to a 14-month peak as investors pinned hopes on further easing by the Reserve Bank of Australia, but the index last traded up 0.3 percent. The early gain came after the RBA said it cut interest rates this month following a pullback in mining investment and a darker global outlook that threatened domestic growth.
Japan's Nikkei average <.N225> added 1.3 percent as an index heavyweight Softbank Corp <9984.T> rallied after the company confirmed a $20 billion acquisition of a U.S. competitor, Sprint Nextel Corp .
"Stocks are supported by the fact that Europe now has a safety net in place to prevent its debt crisis from spinning out of control," said Masahide Tanaka, deputy general manager of asset management business planning department at Mizuho Trust & Banking Co Ltd.
"Global monetary easing and recent positive U.S. data have also helped ease concerns about growth slowdown, warming investor risk appetite," he said.
But Tanaka said equities were capped by the lack of another sector to act as a locomotive in place of flagging tech stocks. The tech-centred Nasdaq Composite Index is some 4 percent off its September peak due to a weak global economy and a growing preference for tablets that has hit the PC industry.
European shares are likely to gain, with financial spreadbetters expecting London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX to open as much as 0.8 percent higher. U.S. stock futures were up 0.2 percent to suggest a firm open at Wall Street.
"The upcoming European session is set to be heavily influenced by a raft of UK inflation measures, European trade balance data, the German ZEW economic sentiment index as well as earnings reports from the likes of Goldman Sachs, IBM and Intel," said Cameron Peacock, market strategist at IG Markets.
DOLLAR/YEN LOOKING FIRM
Traders said momentum is gaining for the dollar to test its upside against the yen. The dollar rose 0.3 percent to a one-month high of 78.91 yen.
With the dollar now at the top of the Ichimoku cloud at 78.88-78.90, a break above that level could pave the way for the currency to hit a key technical level of its 200-day moving average which currently stood near 79.40 yen, said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
Investors will likely focus on the second U.S. presidential debate with Republican candidate Mitt Romney and President Barack Obama, slated for Tuesday at 9 p.m. EDT (0100 Wednesday GMT) in Hempstead, New York.
"If Romney gathers further momentum, stocks may fall and may benefit the dollar as risk appetite recedes," Saito said, adding that markets perceive Romney as being opposed to extending quantitative easing, which also weighed on stocks.
Some traders said speculation about Softbank tapping markets to finance its deal, the biggest overseas acquisition by a Japanese firm, supported the dollar against the yen.
The dollar index , which measures the dollar's value against a basket of six key currencies, remained becalmed.
Spot gold recovered to $1,736.95 an ounce, after hitting its lowest in over one month at $1,728.75 on Monday.
Brent futures held steady above $115, underpinned by supply concerns after the European Union slapped more sanctions on Iran, but gains were capped as the United States, the world's largest consumer, had ample supplies and healthy stocks. U.S. crude futures inched up 0.1 percent to $91.93.
London copper rose 0.9 percent to $8,165 a tonne but wariness ahead of Chinese GDP data put a cap on gains.
Asian credit markets firmed, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 3 basis points.
(Editing by Simon Cameron-Moore)