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Federal Reserve Chairman Ben Bernanke strongly defended the Fed's bond-buying stimulus before Congress on Tuesday, assuaging worries that monetary policymakers might be getting cold feet.
US stocks jumped on Bernanke's comments, bucking a downward trend in global equities and oil prices from the uncertainty created by Italy's election which gave no political party a parliamentary majority, posing the threat of prolonged instability in the euro zone's third-largest economy.
US data on Tuesday painted a positive growth outlook, with new home sales jumping 15.6% to a 4 1/2-year high in January, while US consumer confidence rose more than expected this month.
The MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.5% after shedding 1.2% to a seven-week low the previous session, led by a 0.6% rise in Australian shares. Australian stocks slipped 1% the day before.
"We're reacting positively to Wall Street last night," said Steven Daghlian, market analyst at Commonwealth Securities, of shares in Australia. "This was thanks to some strong economic data coming from North America, consumers are at the most confident in three months there and home prices rose."
Japan's Nikkei stock average fell 0.8%, extending losses from the previous day's 2.3% tumble as the yen firmed and hurt exporters.
Investors were also wary of $85 billion in automatic, across-the board government spending cuts in the United States due on Friday unless lawmakers reach a budget deal to avoid them.
Crude oil also recovered from Tuesday's fall, with US crude rising 0.2% to $92.80 a barrel, recovering from Tuesday's low of $91.92, its lowest since January 4. Brent rose 0.2% to $112.95.
Italy Fallout eyed
Euro zone shares sank to three-month lows on Tuesday and Italy's 10-year bond yields rose to 4.90%, their highest since mid-December, pulling Spanish and Portuguese yields higher.
US Treasuries yields held near one-month lows on Tuesday, supported by safe-haven demand.
The "risk-off" sentiment has not yet spread out fully, with risk currencies such as the South African rand and the New Zealand dollar showing a relatively limited drop compared to sharp swings in major currencies such as the euro, analysts said, adding that if the spread between Italian and German 10-year yields were to exceed 400 basis points, it would signal full-fledged risk aversion stirred by Italy.
"It is one thing to have a surge in yields on Italy debt; it is another thing to talk about a bailout of Italy and we are not close to anything like that, at this time. It's just a massive repricing event, and that's enough to pull funding away from equities in the short-term," said Richard Hastings, macro strategist at Global Hunter Securities.
The euro was down 0.1% to $1.3045, above a seven-week low of $1.3018 on Tuesday.
The yen firmed 0.3% against the dollar to 91.69. The yen hit its lowest since May 2010 of 94.77 on Monday before the outcome of Italian vote rattled financial markets and sent the yen soaring to 90.85 yen. The yen was also up 0.4% against the euro to 119.64 after jumping to 118.74 on Monday from its day's low of 125.36.
Traders have said the rapid pace of yen weakening over the past three months has probably paused, with markets looking for a fresh catalyst -- including the Bank of Japan's actual rather than proposed unconventional easing steps, and Japanese investors buying foreign assets.
"The money flows into short yen trades are slowing, and the risk of losing on short yen action has increased significantly in recent days," Hastings said.
But the yen's latest rebound of about two yen suggested that investors were still betting on Prime Minister Shinzo Abe's aggressively reflationary "Abenomics" policy mix.
"It was largely investors adjusting positions after US stocks had rallied without a sense of caution and the yen steadily fell," said Yunosuke Ikeda, a senior FX strategist at Nomura Securities.
A key factor underpinning the dollar/yen is the limited drop in US Treasury yields, with benchmark 10-year yields trading around 1.88%, he said.
Ikeda estimated that expectations for Prime Minister Shinzo Abe's reflationary policies have accounted for about 10 yen of a roughly 14-yen slide against the dollar in the last three months, while 2 yen each was attributable to an improving global sentiment and Japan's deteriorating trade balances.
