Oil hovers at 2.5 year highs, stocks edge up

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By Saikat Chatterjee

HONG KONG | Mon Apr 11, 2011 12:00am EDT

(Reuters) - U.S. crude oil futures hovered around $113 a barrel on Monday for the first time since September 2008 on supply concerns, while the euro climbed on increasing expectations of another rate hike by the European Central Bank in July.

Widening unrest in the Middle East and a weakening dollar lent new impetus to a rally in oil markets with Brent crude briefly hitting the $127 mark before pulling back slightly on prospects of a peace deal in Libya.

But stock markets and commodity traders chose to focus instead on stronger-than-expected trade data from China and expectations that political risks in the Middle East would be contained.

Asian stocks outside Japan .MIAPJ0000PUS edged up, extending hefty gains of the last three weeks, with Chinese .SSEC and Australian shares .AXJO leading gains, helped by investments from overseas, a trend that has picked up in recent sessions.

During the first week of April, flows into Asia-ex Japan equity funds hit a 20-week high as expectations grew that most Asian economies were able to keep inflationary pressures in check, data from fund-tracker EPFR Global showed.

After a patchy start to the year, emerging markets have roared back in recent weeks as policy tightening in China showed that authorities in the world's biggest economies are getting more sanguine about growth prospects.

Three central banks in Asia are set to review monetary policy this week with Singapore likely to tighten policy further by recentering its currency band higher, which investors said would be another thumbs up for emerging market prospects.

"This means more capital inflows into emerging market assets and likely continued gains in their currencies," Credit Agricole strategists said in a daily note.

COMMODITIES ROAR

A weaker greenback and strong trade data from China helped lifted commodity prices across the board, with the Reuters-Jefferies CRB index .CRB rising to its highest levels since September 2008.

LME copper gained 0.3 percent to $9,905 a tonne, extending gains from last week, after data showed Chinese copper imports rose 30 percent on the month. Tin hit a record high for the second straight session.

Expectations of strong corporate earnings reports in coming weeks may further boost gains.

HSBC strategists said the sharp rebound in China's March exports after February's slump suggested global growth prospects remained strong, notwithstanding the earthquake and tsunami in Japan.

Gold jumped to a record for a fifth straight session while firm oil prices and an increase in ETF holdings to an all-time high helped silver hit a 31-year high above $41 an ounce.

In currency markets, the euro rose to 15-month highs around $1.4488, paving the way for a test of $1.4582, the Jan 2010 high, as expectations grew that the ECB would follow up April's quarter point rate increase with another one in July.

While the euro's gains have gathered steam from the March lows after ECB President Jean-Claude Trichet first hinted at an April rate hike, the yen and the dollar have floundered as the Federal Reserve and Bank of Japan are expected to keep interest rates near zero for an extended period of time.

U.S. Treasury yields paused after rising for three straight weeks as traders waited for a slew of supplies this week.