Oil Prices Drop And Asian Markets Witness Slight Uptick Owing To Inflation

Asian shares edged higher on Monday as investors braced for a week in which U.S. inflation data will put to the test bets on the next move in interest rates, while concerns about a potential credit crunch weighed on the dollar.

The robust U.S. payrolls report on Friday has already dampened easing hopes, and any upward surprise in consumer prices would call into question bets on a rate cut as soon as September.

The headline and core CPI are expected to rise by 0.4% in April, with the annual rate of core inflation slowing slightly to 5.5%.

Later Monday, markets will pay close attention to the Federal Reserve's survey of loan officers as they try to gauge the impact of regional banking stress on lending.

"The survey should point to further broad-based tightening in bank lending standards," said Bruce Kasman, JPMorgan's head of economic research.

"Continued stress in the banking system does, of course, increase concern that a disruptive financial market event is on the horizon," he added. "Though our analysis suggests that the impact of credit tightening against an otherwise healthy backdrop tends to be limited."

Markets started slowly due to caution, and MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7%, while Japan's Nikkei fell 0.6%.

Chinese blue chips rose 1.2% ahead of trade and inflation data due later this week.

The EUROSTOXX 50 futures rose 0.2%, while the FTSE futures were closed for a holiday.

S&P 500 and Nasdaq futures were both flat after rising on Friday in response to Apple's positive earnings report.

While the S&P 500 is up nearly 8% so far this year, that is entirely due to just five mega stocks, which have risen by 29% so far this year and trade at a 49% premium to the rest of the index.Bond markets were still stinging from the strong payrolls report with U.S. two-year yields up at 3.93 per cent after briefly getting as low at 3.657 per cent last week.

The risk of a US government default has not helped, with US Treasury Secretary Janet Yellen warning on Sunday of a possible crisis if Congress does not raise the debt ceiling.

Futures suggest that the Fed will keep rates steady at its next meeting in June, with a 75 percent chance of a cut in September.

The European Central Bank is still expected to raise rates by at least one more time, while the Bank of England is widely expected to raise rates by a quarter point on Thursday.

The diverging rate outlook has supported the euro and pound, with the latter reaching a one-year high against the US dollar last week. On Monday, the euro was trading at $1.1034 per dollar, just below its recent high of $1.1096.

"While it is premature to get too 'beared up' on the dollar until a clearer peak in US rates is seen, the US banking sector woes, which have no easy/costless solutions, continue to make for a mildly bearish medium-term story," said Alan Ruskin, Deutsche Bank's head of global FX strategy.

"Certainly, it imposes more growth constraints and a greater stagflationary bias than major competitors."

The dollar has performed better against the yen because the Bank of Japan is the only developed-world central bank that has not tightened policy. The dollar was trading at 134.82 yen, while the euro was trading at 148.75, not far from its recent 15-year high of 151.55.

The prospect of a pause in rate hikes in the United States has been a boon for non-yielding gold, which was trading at $2,021 per ounce after approaching a record high last week.

Oil prices have been falling as fears of a global economic slowdown have outweighed planned output cuts, with US crude falling more than 7% last week.