Asian shares edged higher on Monday but uncertainty facing the global economy capped prices as a private survey showed Chinese manufacturing contracted this month from two-year highs.
European markets are seen rising, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX would open as much as 0.4% higher. U.S. stock futures were steady to suggest a calm Wall Street start.
Investors remain wary of fragility in the global economic recovery, having pushed markets broadly higher over the past few months as pessimism over the euro zone's debt crisis and U.S. budget woes receded.
But now markets are wondering whether Italy's weekend elections will produce a stable government, and the implications of that for euro zone cohesion, while Moody's credit downgrade on Britain weighed on confidence in the pound.
Testimony on Tuesday from Fed Chairman Ben Bernanke may offer for further clues of when the Fed intends to slow or stop buying bonds: Financial markets were rattled last week by minutes of the Fed's January meeting showing some Fed officials were mulling scaling back its strong monetary stimulus earlier than expected.
"It's a waiting game at the moment, with the U.S. Fed chief's testimony on Tuesday and the outcome of the elections in Italy due to come. We're not sure if this is the bottom," said Jackson Wong, Tanrich Securities' vice-president for equity sales.
China's HSBC flash purchasing managers' index (PMI) for February slipped to a four-month low of 50.4 from January's final reading of 52.3, which had been the best performance since January 2011. The flash PMI, however, did indicate a fourth consecutive month of expansion, even though it just managed to avoid the 50-mark separating expansion from contraction.
Hong Kong shares were up 0.1% and Shanghai shares rose 0.5%, but the PMI news pared early gains.
The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.1%, pulled higher by Australian shares which gained 0.8% on strong financials and retail stocks.
South Korean shares bucked the trend and fell 0.5%, on news that an advocate of aggressive monetary easing was poised to head the Bank of Japan pressured Korean carmakers.
The Nikkei newspaper reported the Japanese government is likely to nominate Asian Development Bank President Haruhiko Kuroda and Kikuo Iwata, both vocal advocates of aggressive monetary expansion, as BOJ governor and deputy governor.
The Nikkei closed up 2.4% at a 53-month high as the yen touched its lowest since May 2010 against the dollar and five-year Japanese government bond yields hit a record low.
Prime Minister Shinzo Abe on Friday vowed to get the world's third biggest economy growing again as he met with President Barack Obama. The United States and Japan also agreed on language during Abe's visit that could set the stage for Tokyo to soon join negotiations on a U.S.-led regional free trade agreement – the Trans-Pacific Partnership.
The prime minister's "Abenomics" policy of powerful monetary and fiscal stimulus, with its consequent weakening of the yen, has cheered investors who have pushed the Nikkei average up some 30% and the yen down 20% against the dollar over the past three months.
The yen touched a low of 94.77 against the dollar, while the euro rose to a high of 124.83 yen.
The dollar fell sharply to below 93 yen last week on media reports that Toshiro Muto, a former financial bureaucrat perceived as less willing to take unconventional steps, was the frontrunner candidate for the top BOJ job.
Speculation over the BOJ has been a key factor driving the yen lower recently due to expectations of strong reflationary measures, but fundamental factors such as Japan's deteriorating trade balances and signs of firmer U.S. growth also supported a weakening yen trend.
In the U.S., with five days left before $85 bln is slashed from U.S. government budgets, the White House warned about the harm the cuts will do to Americans. The euro firmed 0.1% to $1.3199, off Friday's six-week low of $1.31445.
Sterling fell to a 31-month low of $1.5073 early on Monday and a record low against the New Zealand dollar at NZ$1.8025 following Friday's one-notch downgrade of Britain's prized triple-A sovereign rating by Moody's.
Hedge funds and other big speculators cut their bullish bets on U.S. commodities by the most in about ten months in the week to February 19, just before oil and metals prices tumbled on rumours a commodities hedge fund was dumping positions.
U.S. crude steadied at $93.12 a barrel and Brent eased 0.1% to $114.
