HONG KONG -- Oil prices rose Monday on brewing Middle East tensions, pushing up close to Friday's record high and underpinning Asian stock markets by lifting energy shares.
But the record-breaking rally in oil prices has made stagflation -- quickening inflation combined with slowing economic growth -- a top fear for investors and is propelling Asian stocks to their worst first-half performance in 16 years.
Persistently high food and energy prices have caught consumers, policy makers and portfolio managers by surprise this year as a toxic combination of sluggish global economic growth and rising inflation hits almost every region of the world.
The US dollar has mustered only a small gain in the last three months, so energy markets have taken their cues from an escalating war of words between Israel and Iran, the world's fourth-largest oil exporter.
Fears about dwindling oil supply were already heightened when Libya's most senior oil official said last week he was studying the possibility of cutting output in response to US threats to sue members of the Organization of Petroleum Exporting Countries (OPEC).
"The US dollar is down and there are many high-level geopolitical news items, particularly in the Middle East that are pushing prices up," said Mark Pervan, a senior commodities analyst at the Australian & New Zealand Bank in Melbourne.
"Oil is now a very jittery and news-sensitive market that is running on rumors and concerns of future supply disruptions."
Japan's Nikkei share average, which earlier this year was viewed as a relatively safe alternative amid rising global price pressures sputtered in June on the back of inflation at the highest in a decade and uncertain export demand.
The Nikkei index rose 0.3 percent Monday, helped mostly by energy-related shares but was set for its biggest first-half decline since 1995. The index has fallen more than 11.0 percent since the start of the year.
INVESTORS WEIGH RATE EXPECTATIONS
The MSCI index of shares in the Asia-Pacific region outside of Japan was up 0.3 percent, off a three-month low plumbed on Friday.
The broader pan-Asia index inched up 0.1 percent. It is down around 14.0 percent so far this year, the largest first-half drop since 1992 when Japan was in a recession.
Hong Kong's Hang Seng index rose 0.9 percent in early trade, as dealers hunted for bargains though declines on some market's heavyweight's like HSBC kept gains in check.
For fund managers, risk reduction and safety were the keystones in the first half of the year.
Equity capital outflows from developed markets around the world rose to $105 billion, almost a staggering ten-fold increase over 2007 first-half outflows of $11 billion, EPFR Global, a Boston-based research firm, says.
Emerging market stock funds also registered outflows though mostly because of a big move out of Asia ex-Japan equity markets.
First-half outflows from emerging market stock funds reached $12.0 billion, compared with an inflow of $2.0 billion in the first six months of 2007.
The US dollar slipped to a three-week low against the euro, weighed down by expectations the Federal Reserve will be reluctant to raise interest rates for now given signs of a weak economy.
In contrast, the European Central Bank is widely expected to be the first Group of Seven central bank to raise rates when it meets on Thursday.
The euro rose to a high of $1.5798 in early trading. The dollar was up 0.2 percent at 106.40 yen.
"The surge in oil prices and the slide in US stocks keep the dollar's outlook gloomy and make it difficult for the currency to recover strongly," said a senior dealer at a European bank.
US light crude for August delivery was up $1.50 at $141.70 a barrel, slightly below the record high of $142.99 struck on Friday.
Crude has surged 48.0 percent so far this year, the largest first-half increase since 1999 even though global growth likely remains below its long-term trend.
The spot gold price was down 0.1 percent after hitting a one-month high on Friday. Gold dipped to $925.90/$926.90 an ounce after rising as high as $930.40 last week.
