Asian shares up on hopes of U.S. budget deal

Asian shares touched their highest levels in more than three weeks and commodities rose on Thursday as sentiment improved after a senior U.S. lawmaker said he was "optimistic" on reaching a budget deal before the end of the year to avoid a fiscal crisis.

European shares will likely extend gains seen in the previous session, with financial spreadbetters predicting London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX will open up as much as 0.4 percent.

A 0.4 percent climb in U.S. stock futures also hinted at a solid Wall Street open.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> surged 1 percent, after ending a seven-day winning streak on Wednesday with a 0.3 percent drop.

Japan's Nikkei stock average <.N225> also advanced 1 percent, rebounding from the previous session's one-week closing low on optimism over the U.S. budget talks and a weaker yen. The dollar inched up 0.1 percent to 82.17 yen.

Australian shares added 0.7 percent to three-week highs, supported by banks and gains in global miner Rio Tinto after its upbeat outlook on China and cost-cutting pledges. Shanghai shares rebounded from their lowest levels since January 2009 hit the previous day.

Market gains were subdued, however, with moves largely attributed to position adjustments ahead of year-end bookclosing, as investors were reluctant to make bets given a lack of clarity on the prospects for U.S. budget talks as well as global growth.

"There is less negative news but there are also few decisively positive news, leaving investors rotating in and out of assets which have been overbought or battered, but basically keeping their positions more or less neutral in whatever assets they have," said Yuuki Sakurai, chief executive of Fukoku Capital Management.

"Whether it's the U.S. fiscal cliff or the euro zone debt crisis, it's the same process of muddling through, taking three steps forward and two steps backward, but nevertheless making progress, so that's helping ease concerns of sharp downside risks and keeping markets in ranges," he said.

U.S. equities jumped overnight after U.S. House of Representatives Speaker John Boehner voiced optimism that Republicans could broker a deal with the White House to avoid year-end austerity measures.

President Barack Obama later said he hoped an agreement can be reached before Christmas to avoid a "fiscal cliff" of tax increases and spending cuts worth $600 billion due to start in the new year and aimed at shrinking the budget deficit.

Market players remain wary of a lack of specifics on how the two major political parties plan to arrive at a compromise.

But sentiment has tended to improve on positive comments, reflecting nervousness that if U.S. lawmakers fail to strike a deal, they risk pushing the U.S. economy into recession and dragging down global growth.

The U.S. economy remains on a moderate recovery trend with modest hiring and a fragile housing market.

NO CLEAR TREND

Asia's growth prospects remain mixed, with economies such as Indonesia and the Philippines underpinned by healthy domestic demand and government spending while others such as South Korea and Japan are dragged down by sluggish domestic demand and falling exports.

A key South Korean manufacturing business survey showed on Thursday its index for December fell to match a more than 3-year low, with companies citing economic uncertainties.

China's economy appears to have emerged from its lows but the outlook is uncertain.

"It's not the best time to be making big positional changes now. Most investors are waiting for policy guidance on the structural reforms the Chinese leadership has been talking a lot about," said Alan Lam, Julius Baer's Greater China equity analyst.

"With the United States, Japan and the euro zone focused on spending cuts, and China's patchy success in turning domestic consumption into the main driver of its economy, the global economy may find it tough to muster momentum," said Thomas Lam, chief economist at DMG & Partners Securities.

"If that's the case, then that's probably going to hold back any substantial increase in demand for metals or other commodities," he added.

The euro was steady around $1.2954 after peaking at $1.3010 on Tuesday, its highest level since October 31, on news of a deal on Greece's debt reduction plan paved the way for further aid to prevent Athens' from an imminent default.

U.S. crude futures rose 0.4 percent to $86.86 a barrel and Brent inched up 0.3 percent to $109.82.

Spot gold steadied around $1,720.06 an ounce after slumping 1.5 percent on Wednesday for its biggest one-day drop in nearly a month when deflation worries related to a U.S. fiscal crisis and debt-stricken Greece triggered a heavy bout of stop-loss orders from momentum-driven fund investors.

But investment interest remained high, as illustrated by holdings of the SPDR Gold Trust, the world's biggest gold-backed exchange-traded fund, hitting a record high for a second consecutive day at 1,347.018 metric tons (1484.8 tons) on November 28.

"Generally, people are still pretty bullish on gold and last night was just a one-off correction, nothing extraordinary," said a Singapore-based trader, adding that $1,650-$1,700 would be a good buying level.

Investors were cautiously bullish in Asian credit markets, tightening the spreads on the iTraxx Asia ex-Japan investment-grade index by 1 basis point.

(Additional reporting by Rujun Shen and Melanie Burton in Singapore and Clement Tan in Hong Kong; Editing by Michael Perry & Kim Coghill)