Asian stocks bounced 5 percent from a four-year low on Monday after policymakers around the world took increasingly bold steps to rescue the financial system, including guaranteeing bank deposits and taking stakes in banks.
However, the yen stayed firm against the U.S. dollar and gold also edged up, highlighting investor caution and an unwillingness to dive back into risk-taking just yet, especially with credit markets still barely functioning.
European shares also rose sharply after European leaders hatched a plan that included buying bank debt and stakes.
Global equity markets were gutted last week, and investors even liquidated positions in safe havens like government bonds for cash, on dwindling hopes that anything could be done to keep the global economy from sliding into recession.
Japan's stock market, closed on Monday for a holiday, lost nearly a quarter of its value in a week, twice what it lost in the week of the 1987 crash, while U.S. stocks dropped 18 percent, their biggest weekly decline ever.
"Markets are hugely technically oversold and everyone is starved of good news, so it won't take much to trigger a relief rally. But that's unlikely to be the end of the story," said Geoff Lewis, head of investment services for JF Asset Management in Hong Kong.
"Until we see a return of risk appetite, it's difficult to see how Asia can outperform in line with its relatively superior fundamentals," said Lewis, who anticipated more pressure on banks from their consumer and commercial lending arms.
The MSCI index of Asia-Pacific stocks outside Japan climbed more than 7 percent after slumping by more than a fifth last week to the lowest since December 2004.
Hong Kong's Hang Seng index soared 10.2 percent in skittish trade, rebounding from its worst weekly decline in more than a decade, boosted by Chinese financials such as China Merchants Bank.
Shanghai's main index and Korea's KOSPI rose by under 4 percent, led by banks, while Singapore's Straits Times index surged 6.6 percent, its biggest gain ever.
Australia's benchmark S&P/ASX 200 index ended 5.6 percent higher, clawing back some of last week's 16 percent decline, on a blanket guarantee of all bank deposits from the Australian government.
Indian shares soared more than 7.6 percent, led by No.2 lender ICICI Bank, and government assurances to improve market liquidity.
Taiwan stocks fell more than 2 percent to close at a more-than-five-year low amid continuing liquidity problems in the market.
Indonesia's reopened stock market rose 0.7 percent after sitting out much of last week's global markets tumult, as the government's higher bank deposit guarantee and the central bank's liquidity boosting measures lifted sentiment.
Last week's flight from global equity markets hit both developed and developing markets hard, and some money managers cautioned against wading back into emerging market assets.
Jennifer Tay, Asia-Pacific head of portfolio counselling for Citi Private Bank, said she is urging clients to stay invested in defensive sectors like healthcare, utilities and infrastructure.
"For the next few months, anything that is emerging markets oriented, they would have a further beating," she said at a Reuters Wealth Management Summit in Singapore.
Panic last week about the fate of the global financial system also ripped apart credit spreads and sent volatility soaring.
Wall Street's best known fear gauge, the Chicago Board Options Exchange Volatility index (VIX) roared to an all-time high of 76.94, having more than trebled in the last month.
The spread of three-month London interbank offered rates, used between some large banks, over the three-month U.S. Treasury bill yield widened to a record 459 basis points, after blowing out 359 bps in the last month. The spread is essential to proper functioning of lending markets as it indicates perceived counterparty risk over a so-called risk-free rate.
The widespread measures announced over the weekend appear to have supported confidence among investors that policymakers will coordinate their efforts to stem the worst financial crisis since The Great Depression.
However, the sort of rapid damage inflicted to the financial system and the radical measures being employed to mend it will likely have deep repercussions.
"A palpable sense of a turn in the markets this morning demands a cautionary warning. There will be consequences for global governments circumventing banks' core disintermediation roles in the credit and cash markets," said Brett Williams, credit analyst with BNP Paribas in Hong Kong in a note.
The yen dipped against the euro as equity markets rallied though it was steady against the U.S. dollar. The euro rose to 136.22 yen after trading at 134.97 yen late in New York on Friday The U.S. dollar slipped a bit to 100.20 yen down from 100.64 yen on Friday.
The price of spot gold rose 1.8 percent to $862.40 an ounce, helped by the weaker U.S. dollar against the euro, after tumbling 7 percent on Friday as investors closed out of positions and stayed on the sidelines.
U.S. light crude futures were up 3.6 percent to $80.48 a barrel in a relief rally after hitting the lowest settlement since Sept. 2007 on Friday.
(Additional reporting by Jeffrey Hodgson and Saeed Azhar in SINGAPORE; Editing by Lincoln Feast)