HONG KONG - OIL prices rose on 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.

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 OPEC members.

'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 Mr 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 rose 0.3 per cent on 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 per cent 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 per cent , off a three-month low plumbed on Friday.

The broader pan-Asia index inched up 0.1 per cent. It is down around 14 per cent 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 per cent in early trade, as dealers hunted for bargains, though declines in some market heavyweights like HSBC, kept the 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 US$105 billion (S$142.86 billion), almost a staggering ten-fold increase over 2007 first-half outflows of US$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 totalled US$12 billion, compared with an inflow of US$2 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 economic.

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 US$1.5798 in early trading. The dollar was up 0.2 per cent 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 US$1.50 at US$141.70 a barrel, slightly below the record high of US$142.99 struck on Friday.

Crude has surged 48 per cent 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 per cent after hitting a one-month high on Friday. Gold dipped to US$925.90/926.90 an ounce after rising as high as US$930.40 last week.

KUALA LUMPUR
The Kuala Lumpur Composite Index (KLCI) fell 8.07 points, or 0.68 per cent, to 1,182.47, at midday.

HONG KONG
Hong Kong shares opened nearly 1 per cent higher on Monday as stocks bounced back from days of steep losses, but gains were capped by a 0.8 per cent dip in index heavyweight HSBC Holdings

Asia'a largest refiner, Sinopec, gave up 1.4 per cent as crude oil prices stayed high, putting pressure on the company's refining margins.

The benchmark Hang Seng Index was up 195.57 points at 22,237.92.

The China Enterprises Index of top locally listed mainland firms outperformed the broad market by opening up 1.4 per cent.

SHANGHAI
Chinese stocks fell in very thin trade on Monday as concern about inflation and rising global oil prices continued to hurt the market.

The Shanghai Composite Index ended the morning down 1.18 per cent at 2,715.924 points, near its intra-day low of 2,712.547. Falling Shanghai stocks outnumbered gainers by 633 to 220, while turnover in Shanghai A shares was just 20.8 billion yuan (S$4.13 billion).

The index tumbled 5.29 per cent to a new 16-month closing low on Friday because of rumours that the central bank might soon hike interest rates to fight inflation.

A rate hike did not happen at the weekend, but comments by central bank governor Mr Zhou Xiaochuan over the weekend did not reasure the market. Mr Zhou said inflation could slow this summer but inflationary pressure would remain, and global monetary policy needed to tackle inflation even if it were driven by food and energy prices.

'There was no fresh news domestically over the weekend, but oil prices hit another high overseas and this made more investors retreat from the market - a new low may be set soon,' said Mr Zhang Qi, analyst at Haitong Securities.

This month the index has repeatedly tested and held on a closing basis chart support at 2,723-2,732 points, the late February 2007 and March 2007 lows.

Two straight daily closes below that support area would suggest a clean break, which could target the February 2007 low of 2,541 points.

Oil refiner Sinopec was one of the biggest blue chip losers on Monday because high crude oil prices hurt its refining margins. It slipped 2.82 per cent to 9.98 yuan, extending a 9.12 per cent plunge on Friday.

TOKYO
Japanese share prices rose 0.33 per cent in morning trade Monday, rebounding from a two-month low as bargain hunters emerged after the benchmark index fell for seven straight sessions, dealers said.

But they said gains were capped by concerns about fresh losses on Wall Street on Friday as world oil prices shot past US$142 (S$193.17) a barrel.

The Tokyo Stock Exchange's benchmark Nikkei index climbed 45.04 points to 13,589.40. The broader Topix index of all first-section shares advanced 8.92 points or 0.68 per cent to 1,329.60.