With the Lunar New Year holiday shutting most Asian financial centers, including those in Japan, China, Hong Kong, Singapore and South Korea, trading was light and volatile on many of those exchanges that remained open.

European markets were expected to likewise lack momentum in the absence of major economic drivers and ahead of a meeting of the Eurogroup, where the discussion around the risk of a global round of competitive currency devaluation could re-emerge.

Financial bookmakers called major European indexes .FTSE .GDAXI .FCHIto open flat.

Australian shares were flat after closing at a 34-month high on Friday following positive data from China, the most important consumer of Australia’s commodity exports.

S&P 500 index futures inched up 0.1 percent after the Wall Street benchmark reached a five-year high on Friday.

Brent crude oil, which touched its highest in nine months on Friday, was unchanged just below $119 a barrel.

Foreign exchange trading was choppy in thin volumes, with what traders interpreted as slightly dovish comments from the European Central Bank last week also weighing on the euro, which has shed around 2.5 percent since reaching a 15-month high above $1.37 on February 1.

The euro briefly fell to $1.3325 on Monday, after stop-loss selling was triggered below $1.3340, traders said, before recovering to stand little changed around $1.3370.

There are growing worries about Spain as a scandal on secret cash payments engulfs the prime minister, while confidence in Italy has been shaken in the run-up to a February 24-25 election. “The euro’s upside is likely to be limited and short-lived,” said Aroop Chatterjee, an analyst at Barclays Capital.

“Better financial conditions are likely to be offset by rising political risks, market positioning and a weaker economy. We expect the euro to be on a declining trend beginning in Q2.”

The yen pared a little of its recent heavy losses after Japanese Finance Minister Taro Aso said it had weakened more than intended.

The currency, which has been an easy one-way bet for weeks as Prime Minister Shinzo Abe put intense pressure on the central bank to take bold action to revive Japan’s fragile economy, also recovered from its recent 4-week trough against the Aussie, the latter changing hands at 95.25 yen AUDJPY=R, compared with a peak of 97.42 set on Tuesday.

(Additional reporting by Ian Chua in Sydney and Vidya Ranganathan in Singapore; Editing by Shri Navaratnam)

Commodity prices mostly held firm, supported by data showing
the U.S. economy continuing on a path of slow but steady
recovery that propelled Wall Street stocks to a five-year high.

The dollar sat close to a two-and-a-half-year high against
the yen as investors adjusted to the possibility of more
monetary stimulus in 2013 from the Bank of Japan and less from
the U.S. Federal Reserve.

MSCI’s broadest index of Asia Pacific shares outside Japan
, which had reached its highest level since
August 2011 on Thursday, was flat, while Tokyo’s Nikkei share
average retreated after touching a 23-month high in
early trade to stand down 0.2 percent.

“Investors have been carefully waiting for the timing to
take profits as they believed the market can’t keep rising,”
said Yutaka Miura, a senior technical analyst at Mizuho
Securities.

CASH BUFFERS

The MSCI benchmark’s financial sector sub-index
gained 0.5 percent after the Basel Committee of
banking supervisors agreed on Sunday to give banks four more
years and greater flexibility to build up cash buffers so they
can use some of their reserves to help struggling economies.

HSBC Holdings Hong Kong shares rose 1.3 percent,
while Australia and New Zealand Banking Corp gained 0.6 percent.

Shares in Japanese exporters were supported by a weaker yen,
which traded around 88.05 to the dollar, a little firmer
on the day, after the U.S. currency rose as far as 88.40 yen,
its highest in nearly two-and-a-half years, on Friday.

The dollar posted a gain of around 2.7 percent against the
yen last week, its biggest weekly rise in more than a year. Its
gains had accelerated after minutes from the Federal Reserve’s
December meeting showed some policymakers has mulled ending the
Fed’s bond-buying programme as early as this year.

By contrast, many investors are now betting that Japan’s new
government, led by Prime Minister Shinzo Abe, will push to
weaken the yen and drive through aggressive fiscal stimulus, and
pressure the Bank of Japan to do the same on the monetary side.

The dollar ticked up slightly against the euro, which traded
around $1.3060.

The U.S. benchmark S&P 500 index closed at its
highest level since December 2007 on Friday after data showed a
steady pace of jobs growth and brisk expansion of the services
sector in the world’s biggest economy.

That offered support to growth-sensitive commodities, with
copper edging up 0.2 percent to around $8,100 a tonne,
while Brent crude oil gained 0.2 percent to around
$111.50 a barrel and U.S. crude stood flat just above $93.

Expectations of more aggressive monetary easing under Japan’s new government also drove stocks higher, with the Bank of Japan (BOJ) starting a two day meeting on Wednesday.

The BOJ will ease monetary policy this week and consider adopting a 2 percent inflation target in January, double its current price goal, sources say, after pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation.

Tokyo’s Nikkei share average opened up more than 1 percent, topping 10,000 points for the first time since April.

“The market is already in overbought territory, but investors are increasingly being alarmed that there is a risk of not having Japanese stocks in their portfolios,” said Hiroichi Nishi, general manager at SMBC Nikko Securities.

Australian shares rose 0.6 percent to a new 17-month high, lead by miners and banks. MSCI’s broadest index of Asia Pacific shares outside Japan edged up 0.1 percent.

On Wall Street the S&P 500 rose more than 1 percent on Tuesday to notch up the index’s best two-day run in a month, on growing confidence a deal can be reached to avoid a U.S. fiscal cliff of spending cuts and tax rises in January.

The euro was steady around $1.3226, just shy of its highest since May, and against the yen it fetched 111.53, having risen as far as 111.60, its highest since late August 2011.

“Unless U.S. fiscal cliff talks take an unexpected turn for the worse, we believe that EUR/USD will meet our 1.3300 year-end target,” analysts at BNP Paribas wrote in a note.

The greater appetite for riskier assets also supported oil, with U.S. benchmark crude edging up to $88 a barrel.

(Additional reporting by Ayai Tomisawa in Tokyo and Ian Chua in Sydney: Editing by Michael Perry)

Expectations of more aggressive monetary easing under Japan’s new government also drove stocks higher, with the Bank of Japan (BOJ) starting a two day meeting on Wednesday.

The BOJ will ease monetary policy this week and consider adopting a 2 percent inflation target in January, double its current price goal, sources say, after pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation.

Tokyo’s Nikkei share average .N225 opened up more than 1 percent, topping 10,000 points for the first time since April.

“The market is already in overbought territory, but investors are increasingly being alarmed that there is a risk of not having Japanese stocks in their portfolios,” said Hiroichi Nishi, general manager at SMBC Nikko Securities.

Australian shares rose 0.6 percent to a new 17-month high, lead by miners and banks. MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS edged up 0.1 percent. .T

On Wall Street the S&P 500 .SPX rose more than 1 percent on Tuesday to notch up the index’s best two-day run in a month, on growing confidence a deal can be reached to avoid a U.S. fiscal cliff of spending cuts and tax rises in January. .N

The euro was steady around $1.3226, just shy of its highest since May, and against the yen it fetched 111.53, having risen as far as 111.60, its highest since late August 2011. <FRX/>

“Unless U.S. fiscal cliff talks take an unexpected turn for the worse, we believe that EUR/USD will meet our 1.3300 year-end target,” analysts at BNP Paribas wrote in a note.

The greater appetite for riskier assets also supported oil, with U.S. benchmark crude edging up to $88 a barrel. <O/R>

(Additional reporting by Ayai Tomisawa in Tokyo and Ian Chua in Sydney: Editing by Michael Perry)

The euro was under pressure, having been knocked by the prospect of a recession in Germany and political uncertainty in Italy after Prime Minister Mario Monti, an investors’ favorite, said at the weekend he intended to resign early.

MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS and Tokyo’s Nikkei share average .N225 both gained 0.3 percent. .T

The MSCI index rose more than 1 percent last week, its third successive weekly gain, taking it to levels not seen since early August 2011, and there was a further boost for regional markets on Sunday when China reported a pick-up in factory output and retail sales growth to eight-month highs.

“We had some really good economic data coming out from China,” said Juliana Roadley, market analyst at Commonwealth Securities. “Over the last few years, you had the Chinese government pulling back on growth and trying to control things so that it didn’t over-boil. Now it looks like all that good work has been done.”

Hopes that China’s economy is revving up again after seven straight quarters of slowing growth also boosted riskier assets such as oil and copper.

Asian “risk” markets took in their stride China trade data on Monday that showed both imports and exports below forecasts.

“The export slowdown shows external demand faces uncertainty due to concerns over the fiscal cliff in the US,” Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said. “Nonetheless it does not change our view that growth is on track for a strong recovery in Q4, as (growth) is mostly domestically driven.”

On Wall Street, the Dow .DJI and S&P 500 .SPX had risen modestly on Friday after an unexpected fall in the U.S. unemployment rate. S&P 500 futures were up 0.1 percent on Monday. .N

MARKETS WATCH ITALY

The euro slid in early trading towards a two-week low of $1.2876 plumbed on Friday, before popping back above $1.29. Investors had sold the euro after Germany’s central bank on Friday warned that the euro zone’s biggest economy could soon enter recession.

Italian Prime Minister Monti’s surprise announcement at the weekend came a few days after former Prime Minister Silvio Berlusconi abruptly withdrew support for Monti’s technocrat government, formed over a year ago in an effort to restore Italy’s credibility with investors.

“If Monti’s pro-euro stance is to back off, that should raise concerns about the euro,” said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo.

Italian bond yields will be closely watched on Monday. The 10-year yield, the main barometer of investor confidence, stood at 4.5 percent at the end of last week, 323 basis points higher than the yield on the lower risk German equivalent but well below the 7.3 percent peak hit last year, when the spread over German Bunds hit 550 points.

The U.S. dollar rose about 0.3 percent against a basket of major currencies .DXY.

Commodity markets were also generally firmer, with copper, which draws strength from expectations of Chinese industrial demand, rising 0.2 percent to around $8,050 a metric ton (1.1023 tons) and oil rising around 0.3 percent.

Brent crude trade around $107.40 a barrel and U.S. crude fetched about $86.20. <O/R>

“Investors are slightly more optimistic about China’s economic recovery than before and that is supportive for oil,” said Ken Hasegawa, a commodity sales manager at Newedge Japan.

The easy outlook for monetary policy continued to support gold, with the U.S. Federal Reserve expected to signal this week it will continue to pump money into the economy in 2013. Also, there was talk of a possible rate cut next year by the European Central Bank.

Spot gold firmed 0.1 percent to around $1,705 an ounce. <GOL/>

(Additional reporting by Thuy Ong in Sydney and Manash Goswami in Singapore; Editing by Richard Borsuk)

The euro was also enjoying a positive week, despite data on Thursday pointing to the euro zone sliding into its deepest recession since 2009, with the currency standing up around 1 percent on last Friday’s close on optimism that a funding deal for debt-choked Greece will ultimately be agreed.

Activity was subdued across financial markets on Friday, with exchanges in Japan and the United States closed for holidays.

MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS was little changed, with a rise of 0.2 percent in South Korean .KS11 shares balanced by a similar percentage decline in Australian stocks . .KS .AX

The MSCI index was up around 1.9 percent on the week.

The euro eased about 0.1 percent to around $1.2870 and was steady versus the yen, not far below a six-and-a-half month high against the Japanese currency scaled in the previous session.

Thursday’s HSBC flash Manufacturing Purchasing Managers Index (PMI) for China, which showed expansion in the factory sector accelerating for the first time in 13 months, gave a broad lift to riskier assets such as commodities, with oil, copper and gold all on course for weekly gains.

(Editing by Eric Meijer)

The euro was also enjoying a positive week, despite data on
Thursday pointing to the euro zone sliding into its deepest
recession since 2009, with the currency standing up around 1
percent on last Friday’s close on optimism that a funding deal
for debt-choked Greece will ultimately be agreed.

Activity was subdued across financial markets on Friday,
with exchanges in Japan and the United States closed for
holidays.

MSCI’s broadest index of Asia Pacific shares outside Japan
was little changed, with a rise of 0.2 percent
in South Korean shares balanced by a similar percentage
decline in Australian stocks.

The MSCI index was up around 1.9 percent on the week.

The euro eased about 0.1 percent to around $1.2870
and was steady versus the yen, not far below a
six-and-a-half month high against the Japanese currency scaled
in the previous session.

Thursday’s HSBC flash Manufacturing Purchasing Managers
Index (PMI) for China, which showed expansion in the factory
sector accelerating for the first time in 13 months, gave a
broad lift to riskier assets such as commodities, with oil
, copper and gold all on course for
weekly gains.

The yen held near a six-and-a-half month low plumbed against the dollar after Shinzo Abe, leader of the main opposition Liberal Democratic Party and likely to be Japan’s next leader, called on Thursday for the country’s central bank to adopt interest rates of zero or below zero to spur lending.

Away from Japan investors remained wary of buying riskier assets, spooked by uncertainty about the U.S. budget tussle, the euro zone’s relapse into recession and violence in the Middle East.

President Barack Obama and Congressional leaders begin budget talks on Friday, amid fears the United States will stumble back into recession if no deal is reached to avoid some of the $600 billion in spending cuts and tax hikes due to start taking effect in January.

“The latest comments from key players reinforces to us that the two sides are starting negotiations from rather distant points,” said Sean Callow, senior currency strategist at Westpac bank in Sydney, in a note.

“There will be plenty of negative headlines in coming weeks that weigh on risk assets and boost USD, which is yet again trading like a safe haven even when the bad news is generated by the U.S. We doubt there will be a deal before late December.”

MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS was flat in early trading, while Tokyo’s Nikkei share average .N225 jumped 1 percent, adding to gains of nearly 2 percent on Thursday.

“Expectations on how the new (ruling) party will tackle(Japan) deflation are offsetting persistent concerns on the U.S.’s fiscal cliff for now,” said Hiroichi Nishi, general manager at SMBC Nikko Securities.

The dollar has rallied more than 2 percent against its Japanese counterpart over the past two sessions after Japanese Prime Minister Yoshihiko Noda said he was ready to dissolve parliament’s lower house on Friday for an election on December 16.

The yen traded little changed around 81.20 per dollar on Friday.

“The substantial weakening of the yen in the past 48 hours has a lot of people rethinking their game plan,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.

The euro held steady at $1.2780 EUR=, staying well above Tuesday’s two-month low of $1.2661.

S&P 500 index futures fell 0.2 percent, after Wall Street stocks closed little changed on Thursday. .N

In commodities markets, U.S. crude lost a few cents to around $85.40 a barrel and gold was virtually unchanged near $1,715 an ounce.

(Additional reporting by Lisa Twaronite and Ayai Tomisawa in Tokyo; Editing by Michael Perry)

The retreat from risk also weighed on commodities, with the exception of oil, which jumped in the previous session due to rising tensions in the Middle East after Israel launched an offensive against Palestinian militants in Gaza.

“Of course we did just see a sharp sell-off on Wall Street as we approach that fiscal cliff,” said Stan Shamu, market analyst at IG Markets in Melbourne. “It just seems that there’s not much confidence out there.”

MSCI’s broadest index of Asia Pacific shares outside Japan fell 0.9 percent, with shares in South Korea, Australia and Hong Kong all losing 1 percent or more.

But Tokyo’s Nikkei rose 0.9 percent as the boost given to exporters such as Toyota Motor Corp (7203.T: Quote, Profile, Research), Honda Motor Co (7267.T: Quote, Profile, Research) and Canon Inc. (7751.T: Quote, Profile, Research) by a slide in the yen the previous day outweighed global concerns.

Shares in Playstation maker Sony Corp (6758.T: Quote, Profile, Research) tumbled however, losing 10.7 percent after the company said it would raise $1.9 billion through a sale of convertible bonds.

U.S. stocks fell more than 1 percent on Wednesday after President Barack Obama reiterated his call for the wealthy to pay higher taxes, setting the stage for a tough budget battle with Congressional Republicans.

Investors fear that the package of tax increases and spending cuts mandated to come into force next year if a deal is not agreed – the so-called “fiscal cliff” – will pitch the world’s biggest economy back into recession, dealing a fresh blow to the fragile global economy.

ELECTION CALL WEAKENS YEN

Currency markets were little changed, with the euro flat around $1.2733, having halted a five-day slide that had taken the single currency to its lowest in more than two months, and the yen steady at 80.185 to the dollar.

The yen had fallen the most against the dollar in two months on Wednesday after Japanese Prime Minister Yoshihiko Noda indicated he would call a snap election next month.

Japan’s main opposition Liberal Democratic Party, which favours further monetary policy easing by the central bank, leads in opinion polls and the prospect of an early election is regarded as negative for the yen.

“Everyone is expecting Shinzo Abe from the LDP to be the next prime minister. He will pressure the BOJ to conduct bold monetary easing by setting a 2 to 3 percent inflation target,” said Shun Maruyama, chief Japan equity strategist at BNP Paribas. “In the near-term, we can be bullish on the Nikkei and bearish on the Japanese yen.”

Still, foreign exchange market players said the news alone was unlikely to drive the dollar above the six-month peak of 80.68 yen hit earlier this month.

“It’s questionable whether unorthodox monetary policy will suddenly work miracles in beating deflation,” said Taisuke Tanaka, chief FX strategist at Deutsche Bank in Tokyo.

Benchmark Brent crude firmed 0.1 percent to around $109.70 a barrel, having risen more than 1 percent on Wednesday after Israel launched airstrikes in retaliation from rocket attacks on its territory, killing the military chief of Hamas.

U.S. crude was flat at around $86.30 a barrel.

Copper was weaker, off a little more than 0.1 percent around $7,630 a tonne, while gold crept lower to around $1,725 an ounce.

(Additional reporting by Dominic Lau and Lisa Twaronite in Tokyo and Thuy Ong in Sydney; Editing by Kim Coghill)

The retreat from risk also weighed on commodities, with the exception of oil, which jumped in the previous session due to rising tensions in the Middle East after Israel launched an offensive against Palestinian militants in Gaza.

MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 0.5 percent. But Tokyo’s Nikkei rose 0.6 percent as the lift given to exporters by a sharp fall in the yen the previous day outweighed global concerns. .T

“U.S. stocks fell, and there are concerns about the developing situation in Israel, so sentiment is cautious and the outlook is cloudy and unclear,” said Kenichi Hirano, operating officer at Tachibana Securities in Tokyo.

U.S. stocks fell more than 1 percent on Wednesday after President Barack Obama reiterated his call for the wealthy to pay higher taxes, setting the stage for a tough budget battle with Congressional Republicans.

Investors fear that the package of tax increases and spending cuts mandated to come into force next year if a deal is not agreed – the so-called fiscal cliff – will pitch the world’s biggest economy back into recession.

Currency markets were little changed in early Asian trading, with the euro steady around $1.2730 and the yen at 80.17 to the dollar. <FRX/>

The yen had fallen the most against the dollar in two months on Wednesday after Japanese Prime Minister Yoshihiko Noda indicated he would call a snap election for next month.

Japan’s main opposition Liberal Democratic Party, which favors further monetary policy easing by the central bank, leads in opinion polls and the prospect of an early election is regarded as negative for the yen.

U.S. crude traded down a few cents around $86.25 a barrel. Benchmark Brent crude had risen more than 1 percent on Wednesday towards $110 a barrel after Israel launched airstrikes in retaliation from rocket attacks on its territory, killing the military chief of Hamas.

Gold eased 0.1 percent to around $1,724 an ounce. <GOL/>

(Additional reporting by Dominic Lau and Lisa Twaronite in Tokyo; Editing by Michael Perry)