Asian stocks gained on Monday after Europe took a step towards fiscal union, but the euro fell amid concerns the euro zone's fragile safety is still insufficient to prevent its sovereign debt crisis from spreading.
Twenty-six of the 27 European Union leaders on Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to 200 billion euros in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.
"There was some progress made in Europe, such as having an accord on funding, which helps negative sentiment to recede and risk-on mood to return," said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.
"The fact that the IMF was involved and China was reportedly planning to invest in Europe shouldn't be overlooked either, as having global lenders interested in Europe was also a focal point in gauging the progress in the debt crisis," he said.
MSCI's broadest index of Asia Pacific shares outside Japan rose 1.2 percent on Monday, after sliding as much as 2.8 percent on Friday for a weekly drop of 3.5 percent on concerns over the EU summit's outcome. Japan's Nikkei stock average gained 1.3 percent.
Asian credit markets firmed on Monday on easing risk aversion, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by several basis points on Monday, but trading volume was thin.
Widespread views that the euro zone debt woes were far from being resolved pushed the single currency down 0.2 percent to $1.3350, off Friday's high of $1.3434. The dollar index, measured against six major currencies, inched up 0.1 percent, weighing on gold's safe-haven appeal.
Officials gave a guarded assessment to the result of the EU summit. IMF chief economist Olivier Blanchard said an agreement for deeper economic integration was a step in the right direction but not a complete solution for the crisis.
While bilateral loans to the IMF would help beef up its resources to help struggling euro zone economies when needed, the volume at the euro zone's bailout fund was still seen insufficient to safeguard core euro zone economies from the contagion of the debt crisis.
The capacity of a permanent bailout fund was capped and it was not granted a banking licence.
That will keep intense pressure on the European Central Bank to take on a role as lender of the last resort to help resolve the debt crisis, which has intensified a credit contraction in the euro zone.
"Near-term, there remains inadequate firepower to backstop large euro-area sovereigns; we expect that a reluctant ECB will eventually have to adopt this role," Standard Chartered wrote in a note to clients.
Until the funding scheme is strengthened further, financial strains will persist, as worries about banks' exposure to euro zone sovereign bonds have made them reluctant to lend dollars to each other.
Banks, pressed to beef-up their capital hit by plunging euro zone bond prices, could face additional pressure this week as rating agency Standard & Poor's will follow up on its decision after placing all euro zone sovereigns on creditwatch negative.
Debt yields of highly-indebted countries such as Italy and Spain stayed vulnerable, barely contained by ECB buying in the secondary market. Italy and Spain are scheduled to issue new debt this week and their borrowing costs are likely to continue to rise.
Rising borrowing costs, in turn, will make it difficult to pursue fiscal discipline.
The U.S. economy continued to show resilience, with consumer sentiment rising to its highest level in six months in early December on signs of a better jobs market and an improving economy.
Data from EPFR Global on Friday showed investor preference for U.S. stock funds, with cumulative outflows of 0.12 percent of assets under management since the start of the fourth quarter versus 1.05 percent for Europe Equity Funds and 3.6 percent for Japan Equity Funds.
Analysts said markets will return their focus to the slowing global economy, weighing on the euro and risk assets.