Asian stocks rose on Wednesday as investor risk appetite returned after upbeat US and European economic data improved the global growth outlook, but the euro's gains were short-lived due to deep-set worries over the European debt crisis.
MSCI's broadest index of Asia Pacific shares outside Japan rose as much as 0.9% to its highest in nearly a month, before trimming some gains to stand up 0.6%. The materials sector outperformed.
The index fell 18% in 2011, sharply underperforming Wall Street's S&P 500, which ended the year virtually unchanged, and an 11% drop in the FTSEurofirst 300 index of top European shares.
Japan's Nikkei stock average reached a three-week high and was up 1.4%, but Hong Kong and Shanghai shares lagged, with lacklustre turnover suggesting investors were cautious, refraining from chasing recent gains and taking profits.
"While we are structurally underweight risk, we suggest adopting a more neutral stance in the first two weeks of 2012," analysts at Barclays Capital said in a research note.
"We do not expect higher risk premia because risky assets have sold off to a point where they offer interesting excess returns and because it has become expensive to short risk further unless data consistently surprise on the downside."
European markets were likely to open lower, with financial spreadbetters expecting London's FTSE to start down as much as 0.3%, Frankfurt's DAX down as much as 0.5% and Paris' CAC-40 as much as 0.6% lower.
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Data released on Tuesday showed US manufacturing grew at its fastest pace in six months in December, while US construction rose to a near 1-1/2-year high in November.
Elsewhere, German unemployment fell sharply to the lowest in two decades, easing concerns that the euro zone debt crisis was putting a drag on global growth. The numbers followed earlier surveys showing Chinese manufacturing and service data topping forecasts and the euro zone's purchasing managers index contracting less than had been feared.
Asian credit markets firmed, with spreads on the iTraxx Asia ex-Japan investment grade index tightening a tad. Positive sentiment may spur an early issuance rush as borrowers seek to take advantage of favourable conditions while they last to meet their 2012 funding needs.
Debt, economy dictate, 2012
The euro eased 0.1% to around $1.3035 after posting its biggest one-day rally in nearly two months and reaching a one-week high of $1.3077 the previous day on upbeat data. It hit a 2011 low of $1.2856 on December 29.
The euro also eased 0.1% to below 100 yen, but off a trough of 98.71 yen hit on Monday, its lowest since late 2000.
Oil prices slipped but were still largely underpinned by supply disruption concerns as a result of growing tensions between Iran and the West.
Volatility will persist in 2012 given the uncertainty over the course of the euro zone debt crisis and its impact on the global economy, but it will not be as sharp as was in 2011, unless major unforeseen risks to the downside emerge.
"The basic structure is unchanged from 2011, that is, developed countries will be undermined by the euro zone debt crisis and its fallouts while developing countries will manage to spur domestic demand, supporting industrialised countries' exports," said Makoto Noji, senior strategist for SMBC Nikko Securities.
Asian equities may face more downside risks should the euro zone crisis come to a critical point, but that would "set up the potential for renewed outperformance by Asia, led by China, which would have substantial room to ease," brokerage CLSA said.
Analysts say global economic data and European events will continue to drive markets in 2012, and that investors were expected to remain wary of aggressively taking risks throughout the year.
"We expect global economic concerns to begin to dominate as Q1 2012 progresses," Standard Chartered said in a note to clients. This week's highlight is US jobs data due on Friday.
The analysts at Barclays Capital said they would recommend "being structurally short the EUR, underweight currencies that are sensitive to European risks, and tactically going neutral (from underweight) risky currencies during times when risk sentiment temporarily improves".
Risks related to the euro zone debt crisis include progress in Greece's fiscal reforms, Italy's refinancing of about 150 billion euros of government debt in February-April alone and the possibility of sovereign credit rating cuts in key euro zone economies including France.