* Asian shares firm as dollar rally takes a breather
* Italian shares recover sharply despite political uncertainty
* Focus shifts to Thursday’s ECB meeting
* Oil snaps rally that followed OPEC meeting
By Hideyuki Sano
TOKYO, Dec 7 (Reuters) - Asian shares rose on Wednesday as investors covered short positions and looked to the coming policy meeting of the European Central Bank for comfort after a referendum defeat tipped Italy into political turmoil.
Europe was expected to follow suit and post opening gains, said CMC Markets chief market analyst Michael Hewson, who added that the German DAX was potentially set to open at its highest levels since early January, and above the 10,800 level that has capped every rebound since August.
MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.25 percent while Japan’s Nikkei ended 0.7 percent higher.
Australian shares rose 0.91 percent despite data showing the economy contracted in the third quarter. While rate futures <0#YIB:> imply scant chance of another interest rate cut in the next few months, chances for hike also vanished.
The MSCI’s broadest gauge of the world’s stock markets rose to its highest level in almost two months, having climbed 3.4 percent from its November low.
“After the Brexit and the U.S. election, I think financial markets have learned that even if they see a result that is not necessarily in line with their values, markets will quickly recover as its economic impact is either negligible or will take time to appear,” said Tatsushi Maeno, senior strategist at Okasan Asset Management.
Maeno was referring to Italian Prime Minister Matteo Renzi’s resignation after suffering a resounding defeat on Sunday in a referendum over constitutional reform, leaving the euro zone’s third-largest economy in political limbo.
Among the biggest winners during the past 24 hours were Italian shares, which rose 4.2 percent to 5-1/2-month highs while French shares reached 11-month highs.
Italian banks, at the centre of markets’ focus, saw their shares rising 9.0 percent for their biggest rally in five months on Tuesday, which investors largely attributed to short covering.
The rally came despite fears that the political vacuum could jeopardise a rescue plan for Monte dei Paschi di Siena , the country’s third largest lender and rated the weakest in European stress tests earlier this year.
Political uncertainty is hardly disappearing with Angelino Alfano, interior minister in Prime Minister Matteo Renzi’s outgoing government, saying a new election could be held as soon as February.
“Politics remains a potential risk. But there’s perhaps realisation that it is only the President who can dissolve the parliament after all and he is unlikely to do that now,” said Toru Nishihama, senior economist at Dai-ichi Life Research Institute.
Italian government bond yield also fell to three-week lows as the focus turned to expectations the ECB would contain any financial-market fallout when it meets on Thursday.
The ECB had already been expected to change the terms of its asset-purchase programme to alleviate a shortage of bonds and to extend the programme beyond its current end date in March 2017.
The euro fetched $1.0725, below Monday’s half-month high of $1.0797 but still well above 20-month lows of $1.0505 touched in the wake of Italy’s referendum.
“We expect the ECB to extend its asset purchase programme by six months, which I believe is in line with market expectations. But if there is any sign of tapering, that should boost the euro given that there is still big short positions in the currency,” said Junya Tanase, chief currency strategist at JPMorgan Chase Bank.
The euro also got some support as the dollar’s rally since the U.S. Presidential election lost steam.
The dollar index against a basket of six major currencies was fractionally lower at 100.480, and has now fallen about 1.5 percent from a 13-1/2-year peak hit on Nov. 24.
Against the yen, the dollar stood at 114.23 yen, below its 9-1/2-month high of 114.83 yen set last week.
The Australian dollar fell half a cent after GDP data showed the economy shrank for the first time in over five years as businesses, consumers and government all cut back on spending, an unexpected blow that will challenge policymakers’ optimism for growth.
Oil prices extended losses after having eased on Tuesday for the first time since OPEC agreed on Nov. 30 to cut output.
Data showing record high production in the producer group fed scepticism that it would be able to reduce supplies.
U.S. crude futures dropped 0.3 percent to $50.76 per barrel, off Monday’s high of $52.42. But they are still up more than 11 percent from just before the OPEC reached its first output cut agreement since 2008. (Additional reporting by Lisa Twaronite in Tokyo; Editing by Kim Coghill and Richard Borsuk)