Asian shares edged higher and the euro steadied on Tuesday as markets waited for a second liquidity injection from the European Central Bank to gauge risk appetite that has been somewhat dented by worries over high oil prices.
US and Brent crude oil futures slipped, extending losses after snapping a week-long rally on Monday, hurt by a warning from the Group of 20 leading economies about the risks to global growth from higher oil prices.
MSCI's broadest index of Asia Pacific shares outside Japan edged up 0.3%, with the defensive healthcare sector outperforming. The pan-Asia index has risen 13% this year, while Japanese equities have gained 14%.
"Markets have risen too rapidly and may consolidate from time to time, (with people) looking to buy after prices fall. But underlying sentiment is gradually firming, as people believe they've seen the worst." said Xiao Minjie, chief economist at FuNNeX Asset Management in Tokyo.
He said that while ample liquidity supplied by global central banks was pushing crude prices higher, demand in Europe and China was unlikely to pick up strongly enough to lift oil prices closer to all-time peaks scaled in 2008.
The ECB will conduct a longer term refinancing operation on Wednesday with analysts focusing on the size of the gross allotment as well as net new liquidity. A poll showed 30 euro money market traders expect the ECB to allot 500 billion euros, with forecasts ranging from 200 billion to 750 billion euros.
The ECB's first liquidity injection into the system in late December helped stabilise markets by removing concerns about a liquidity crunch in Europe.
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"Although the issues surrounding Greek PSI (private sector involvement) and additional financial resources for Europe will likely dominate headlines, we believe that the upcoming LTRO and behaviour of energy prices are more important for market sentiment," said Barclays Capital analysts.
Nikkei loses ground
The euro stood steady at $1.3410, off a near three-month high of $1.3487 reached on Friday. The dollar eased 0.5% against the yen at 80.21 yen, retreating from a nine-month high of 81.66 yen hit on Monday.
Greece is proceeding with scheduled steps to restructure its huge debts, setting a March 8 deadline for private holders of its bonds to participate in an unprecedented bond swap. The German parliament endorsed a recently approved second bailout for Greece with a comfortable victory.
Market reaction was muted after Standard & Poor's on Monday cut Greece long-term ratings to 'selective default'.
Among equities in Asia, Japan's Nikkei average retreated from Monday's seven-month highs to fall 0.6% as investors took profits while chipmakers were slammed after Elpida Memory Inc filed for protection from creditors on Monday.
But Elpida's woes helped lift Korean equities, boosting shares in rivals Hynix Semiconductor and Samsung Electronics.
Brent fell 0.4% on Tuesday to $123.65 a barrel, moving further away from a near 10-month peak above $125 a barrel on Friday. US crude fell 0.6% to $107.89 a barrel.
In addition to ample liquidity in financial markets, oil's week-long rally had also been spurred by concerns of supply disruptions amid heightening tension between Iran and the West over Tehran's nuclear programme.
Working to help risk sentiment, fresh US data showed contracts for home resales rose to a near two-year high in January, boosting optimism that the housing market may be recovering.
Highly-indebted and struggling Portugal also looked likely win a positive assessment for its economic reform and cost-cutting efforts from the European Union, the ECB and the International Monetary Fund. That should ensure approval of the next tranche of money under a bailout.
Asian credit markets were subdued, with the spreads on the iTraxx Asia ex-Japan investment-grade index steadying from Monday.