Asian shares rose on Monday as financial shares clawed back some of last week's losses and higher oil prices buoyed energy stocks, but gains were capped by fears of further outflows from emerging equities to developed markets.
London crude prices rose by more than $2 at one point to $114.50 a barrel as worsening turmoil in Libya spurred fresh concern about disruptions to oil production.
Recent unrest in the Middle East pushed London crude prices to nearly $120 last week, their highest level since August 2008, exacerbating worries about inflationary pressures in emerging Asian economies.
Market players said emerging Asian stock markets may continue to underperform compared to developed markets such as Japan and the United States.
Underscoring the recent trend, MSCI's index of Japanese shares <.MIJP00000PJP> rose 1 percent, taking its gains for far in 2011 to nearly 6 percent, while its Indonesian index has shed some 7.5 percent <.MIID00000PID>.
There are strong concerns about inflation based on excessive liquidity and emerging markets have been hurt more by this, said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management in Tokyo.
Developed countries...are not raising interest rates while emerging markets are in the midst of doing so. That is negative for (emerging market) equities and that trend will probably still continue, Akino added.
The Nikkei <.N225> recouped early losses to end 0.9 percent higher on Monday, with some traders attributing the bounce to futures-led buying on a weaker yen against the euro and to month-end window dressing. <.T>
Some Japanese financial shares saw strong gains with Mizuho Trust & Banking Co Ltd <8404.T> jumping 6 percent after a source told Reuters that its parent Mizuho Financial <8411.T> planned to buy it out along with two other units.
MSCI's index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> edged up 0.2 percent after hitting three-month lows last week on worries that anti-government protests would spread to other Middle East oil producing countries. The ex-Japan index has lost more than 3 percent so far this year.
Part of the divergence with developed markets likely reflects position unwinding, said Adrian Foster, head of financial markets research with Rabobank International in Hong Kong.
Late last year, massive liquidity driven rallies in global equity markets helped give a boost to emerging market shares, Foster said.
That largely explains why (emerging) equity markets this year have been quite weak. Just the unwinding of these... particularly in India and also in Indonesia, Foster added.
A growing aversion to risky assets in the week to February 23 fueled the biggest flows to global bond funds in more than three months, and turned more investors away from emerging market stocks, according to fund tracker EPFR Global.
With more than $20 billion leaving emerging market stock funds since mid-January, it is the longest period of outflows since the financial crisis deepened in September 2008.
DOLLAR FINDS FOOTING
The dollar found a steadier footing, having rebounded after hitting a record low against the Swiss franc on Friday, but the mood remained cautious given tensions in Libya and fears of contagion.
The dollar last stood at 0.9270 francs, down 0.2 percent on the day but above a record low of 0.9229 hit against the safe haven Swiss currency on trading platform EBS on Friday.
The euro dipped 0.1 percent against the dollar to $1.3744, but the single currency was seen staying in favor ahead of a European Central Bank meeting this week.
With rising commodity prices, the ECB will likely continue its tough talk on inflation, increasing the probability of early ECB tightening, BNP Paribas analysts wrote in a note.
Traders said the euro ran into some profit-taking as did the Australian dollar, which fell 0.3 percent to $1.0143.
Elsewhere, benchmark 10-year U.S. Treasuries rose 6/32 in price to yield 3.394 percent on worries that higher fuel prices could stunt economic growth, while gold edged up 0.3 percent to $1,413.10.
Gold, a traditional safe haven, was on course for a 6.2 percent monthly gain, its biggest since November 2009.
(Additional reporting by Osamu Tsukimori in Tokyo and Ian Chua in Sydney; Editing by Richard Borsuk)