* Reflation trade gains legs after oil output cuts
* U.S. yield curve extends steepening pattern
* Flows still favour developed markets over EM
* European shares expected to open higher
By Saikat Chatterjee
HONG KONG, Dec 12 Oil prices jumped to their
highest levels in a year and a half on Monday after OPEC and
non-OPEC producers agreed to cut oil output to ease a global
glut, while the U.S. dollar extended gains before a Federal
Reserve meeting this week, at which a rate hike is widely
The agreement between OPEC and a number of other oil
producing nations was the first joint action since 2001,
following more than two years of low prices that strained many
government's budgets and spurred unrest in countries from the
Middle East to Latin America.
Brent futures for February delivery rose 4.4 percent
to $56.72 per barrel, with U.S. crude rising 4.8 percent
to $53.98 per barrel in Asian trade.
The jump in oil prices comes in the wake of a renewed focus
on inflation after data on Friday showed a rare spike in
producer prices in China, prompting investors to worry that
inflationary pressures are making a come back globally.
"We have seen OPEC and non-OPEC producers agreeing, which is
also boosting reflation expectation around the world," said
Chris Weston, an institutional dealer with IG Markets.
The 10-year U.S. Treasuries yield rose as high
as 2.5 percent in Asian trade, matching its 2015 peak.
In another sign of the reflation trade, breakeven rates, the
gap between yields of five-year U.S. debt and a matching tenor
in inflation-protected securities, were at
two-month highs, indicating markets are expecting inflation to
European shares were expected to open higher following
strong gains in the previous week which saw the STOXX 600
score its best week since January 2015. IG Markets
expected Germany's DAX and Britain's FTSE to
mark solid gains at the open.
MSCI's broadest index of Asia-Pacific shares outside Japan
dropped 0.5 percent after posting its biggest
weekly rise in nearly three months last week. But energy plays
in Hong Kong and Shanghai such as CNOOC and PetroChina
were among the top gainers.
Japan's Nikkei ended up 0.8 percent at its highest
closing level since mid-December last year.
Despite the bounce in some Asian stocks, broad investor
sentiment remained cautious from a flows perspective with data
showing a pick up in outflows from emerging markets and inflows
towards U.S. markets, according to Jefferies analysts.
A preliminary survey from the University of Michigan on
Friday showed U.S. consumer sentiment index at its highest since
January 2015, which may see the Fed strike a more confident tone
on the U.S. economic outlook at its final policy meeting of 2016
starting on Tuesday.
Futures have virtually priced in a rate increase this week
while the greenback gained fresh legs from the data. It was 0.2
percent higher against the Japanese yen at 115.61.
The euro changed hands at $1.0556. Analysts at BBH
expect a rebound to 1.07 per dollar if the 1.05 level is not
Morgan Stanley economists expect six rate increases between
now and end-2018 and say that any dollar pause is an opportunity
to add to long positions though some analysts adopted a more
"The markets are expecting too much from the Fed and that is
what latecomers to the dollar rally will be thinking," said
Cliff Tan, a markets strategist at Bank of Tokyo-Mitsubishi UFJ.
Spot gold steadied at $1,157.76 per ounce after
hitting its lowest levels since early February.
(Additional reporting by Rushil Dutta in Bengaluru; Editing by
Kim Coghill and Eric Meijer)