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* Oil set for biggest first-half rise in 9 years
* Asia stocks post worst first-half in 16 years
* U.S. dollar slips to three-week low vs euro
(Updates prices with close of Japanese stock market, adds
European outlook, comments)
By Kevin Plumberg
HONG KONG, June 30 (Reuters) - Oil prices rose on Monday
spurred by brewing Middle East tensions, climbing near Friday's
record high $142.99 a barrel and weighing on Asian stocks,
which posted their worst first-half performance in 16 years.
European stocks were expected to open lower across the
board on fears inflation will gobble up returns.
Financial bookmakers in London expected Britain's FTSE 100
index <> to open between 11 and 15 points lower, the
German DAX <> 9 to 13 points lower, and the French CAC 40
<> 14 to 15 points lower.
The record breaking rally in oil prices has made
stagflation -- quickening inflation combined with slowing
economic growth -- a top fear for investors and is making
analysts unhopeful about equity markets in the second half.
The MSCI index of shares in the Asia-Pacific region outside
of Japan was down 0.2 percent <.MIAPJ0000PUS>, near a
three-month low plumbed on Friday.
The broader pan-Asia index <.MIAS00000PUS> was largely
unchanged. It is down around 14 percent so far this year, the
largest first-half drop since 1992 when Japan was in a
recession.
With the U.S. dollar only able to muster a small gain in
the last three months, 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 U.S.
threats to sue OPEC members.
"The U.S. 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 rumours 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 with inflation in the
world's second-largest economy at the highest in a decade and
export demand uncertain.
The index <> fell 0.5 percent on Monday and chalked up
its biggest first-half decline since 1995. The index has fallen
12 percent since the start of the year.
Hong Kong's Hang Seng index <> was essentially flat,
with declines in some market heavyweights such as HSBC <HSBA.L>
<0005.HK> offsetting gains in resource-related shares.
(To see a table on the performance of Asia stock markets so
far this year, click on [])
"STAGFLATION IS HERE"
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, a staggering nearly ten-fold
increase over 2007 first-half outflows of $11 billion, EPFR
Global, a Boston-based research firm, said.
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
totalled $12 billion, compared with an inflow of $2 billion in
the first six months of 2007.
The U.S. 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 continuing
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.
"Stagflation is here," read the subject of a weekly report
from JPMorgan asset allocation strategists.
They said the near-term outlook for stocks and credit
products has worsened though emerging market assets should
outperform developed markets as long as policy makers in the
region act in unison to counter inflationary pressures.
"Their reluctance to respond aggressively to the inflation
threat now is eroding their credibility, raising the risk that
they will have to move more abruptly next year, damaging their
economies and local markets," the strategists said.
The euro rose to a high of $1.5798 <EUR=> in early trading.
The dollar was down 0.35 percent at 105.78 yen <JPY=>.
U.S. light crude for August delivery <CLc1> was up $1.75 at
$141.96 a barrel, slightly below the record high of $142.99
struck on Friday.
Crude has surged 48 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 <XAU=> was up 0.1 percent after hitting
a one-month high on Friday. Gold rose to $928.10/929.10 an
ounce after rising as high as $930.40 last week.
