Debt crisis: Markets, euro surge on EU bond support

Euro zone members agreed to emergency action to lower borrowing costs of Italy and Spain, saying euro area rescue funds could be used to stabilise bond markets without forcing countries that comply with EU budget rules, and to create a single supervisory body for the bloc's banks.

"Because market expectations on the summit were so depressed, it was a bit like there was a drop of rain in desert," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

"But it's not clear exactly what was agreed so we still need to see the debate in the second day of the summit."

MSCI's broadest index of Asia-Pacific shares outside Japan soared 2.1 percent for its biggest one-day rise since mid-January, led by Hong Kong shares buoyed by investors covering short bets after the unexpected euro zone deal. U.S. stock futures also jumped 1.1 percent.

European shares were likely to shoot higher at the open, with spreadbetters predicting that region's major markets

would open up as much as 2.4 percent.

Japan's Nikkei average jumped 1.6 percent, but remains down about 11 percent so far in the second quarter after surging 19.3 percent in the first-quarter for the biggest first-quarter gain in 24 years.

The euro spiked against the dollar to $1.26285 from around $1.2450 earlier. The euro was last up 1.1 percent at $1.2568, on course for its biggest daily jump in eight months.

"Definitely some good news for risk markets here though it is not the 'big bazooka' - the EU leaders did not place stress on the possibility of Euro bonds," said Westpac Bank foreign exchange senior strategist Sean Callow. The creation of common euro bonds is staunchly opposed by Europe's paymaster Germany.

Callow said the rise in the euro had been accelerated by traders scrambling to cover the huge short positions that had built up betting against the currency and dismally low expectations going in to the summit.

Italy and Spain, threatened by markets pressure pushing their borrowing costs to unsustainable levels, had blocked a 120 billion euro ($149 billion) growth package at the start of the two-day EU summit on Thursday to demand urgent action to calm their credit woes.

EUROPE MAKES Q2 DISMAL

The dollar's retreated against a basket of currencies , down 0.9 percent, helped push up oil futures more than $1, with U.S. crude rising 2.1 percent to $79.35 a barrel and Brent up 1.4 percent at $92.66 a barrel.

Still, as the prolonged euro zone debt crisis continues to stifle global growth prospects, crude oil futures were on track for the worst quarterly performance since the 2008 financial debacle.

London copper rose 1.5 percent to $7,492.25 a tonne, helped by a weaker dollar and assurances by Beijing that top metals consumer China will meet its GDP growth target for the year.

Spot gold was up 0.9 percent at $1,563.85 an ounce, after hitting a session high of $1,569.20.

But fear of deflation undermined the usual perception of the precious metal as a safe-haven, with gold set for its worst quarter since 2004.

The MSCI Asia ex-Japan share index was set to drop 7.9 percent on the quarter, the first quarterly drop since end-September. thanks.

"This year up to the end of June has been characterised by a highly uncertain political situation globally, making it nonsense for investors to make long-term commitments and take huge positions," said Goro Ohwada, president and CEO at Aino Investment Corp, a Japan-based fund of hedge funds.

"Markets swing up and down on a piece of news short-term, but there is no sustainable underlying trend which fund managers can bet on and carve out direction."

The third-quarter outlook was unlikely to brighten either as volatility tends to heighten in holiday-thinned August, while a commodities' crash in 2008 and financial failures such as Long Term Capital Management and Lehman Brothers happened during the July-September period, Ohwada noted.

Analysts expected markets to return their focus to data, with the key monthly U.S. jobs report due next week and the official China PMI over the weekend, the latter expected to show that activity at China's factories fell to seven-month lows in June.

Asian credit markets firmed with a tepid recovery in risk appetite, pushing the spread on the iTraxx Asia ex-Japan investment-grade index narrower by 3 basis points.