Oil up on storm fears as Asia stocks slump

By Kevin Plumberg

HONG KONG (Reuters) - Oil rose above $116 a barrel on Monday, as a quarter of U.S. crude production was shuttered because of Hurricane Gustav, while Asian stocks were slammed by slumping technology shares.

European share market futures pointed to a lower open, with special attention on the bank industry after Commerzbank agreed to buy Dresdner Bank from Allianz in a $14.5 billion deal.

Hurricane Gustav was expected to strike land west of New Orleans, on the Louisiana coast, only days after the somber anniversary of Hurricane Katrina's devastation in 2005, though the storm was not expected to strengthen significantly once it made landfall.

South Korea's won fell sharply against the U.S. dollar as dealers panicked about the potential for foreign investors to bail out of their domestic debt investments because of deteriorating conditions in Asia's fourth-largest economy.

The dollar, meanwhile, rose broadly, extending last month's biggest rally in more than a decade, on the view the U.S. economy is likely to recover more quickly than other major economies that are probably shrinking. The dollar's rally was striking since it took place with oil prices also rising, which showed the crude market's singular focus on Gustav.

"This is definitely a dangerous storm but I think most of the market is in a wait-and-see mode," said Gerard Burg, a commodities analyst at National Bank of Australia in Melbourne. "Investors are a lot more cautious now given the general bearish sentiments in the market."

The October U.S. light crude contract climbed 99 cents to $116.45 a barrel, though was only $5 from an August low. U.S. markets are closed on Monday for a holiday.

A 4.1 percent drop on South Korea's benchmark KOSPI stock index to the lowest since March 2007 led the region lower. Shares of Samsung Electronics Co Ltd and LG Electronics were the biggest drags on the index.

The Korean won lost about 2.5 percent to 1,116.00 per dollar, the weakest since November 2004, despite countless times the Bank of Korea has defended its currency this year.

The country's markets entered September in a somber mood given the unusually high amount of won-denominated bonds maturing in September held by foreign investors. The fear is that investors may take their money and walk, rather than rolling over the debt.

"This is more to do with the market panicking about what may happen and also the market is increasingly convinced intervention cannot be as aggressive as it was in previous months. There's a perception the Bank of Korea is running out of ammunition," said David Mann, head of research, Korea and foreign exchange strategist with Standard Chartered in Hong Kong.

"The worst point will be over the next few weeks rather than the next few months," he said.

FUND REDEMPTIONS

Japan's Nikkei stock index finished the day down 1.8 percent, with shares of electronics parts maker Kyocera Corp the heaviest weight.

Stark comments about slowing global demand for technology from the world's second-largest computer maker Dell Inc, which knocked U.S. stocks lower on Friday, dealt a blow to a sector whose valuations have been among the hardest hit by the bear market.

Outside of Japan, Asia-Pacific stocks fell almost 2.5 percent to their lowest level since March 2007.

The Shanghai composite index in China tumbled 3.2 percent on pessimism about the outlook for corporate earnings, extending its year-to-date fall to just over 50 percent.

Investors last week pulled $7.6 billion out of 17 of the 24 equity, sector and fixed income groups watched by EPFR Global, a Boston-based firm that tracks $10 trillion in assets. Financial sector funds were one of the few that attracted new money.

All emerging market fund groups recorded outflows last week, with money leaving emerging market equity funds for the 11th time in the last 12 weeks.

"Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during the third quarter of 2008, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina," the firm said in a research note released over the weekend.

The dollar strengthened against both major and emerging market currencies, ahead of a busy week of central bank meetings, including the European Central Bank, the Bank of England and the Reserve Bank of Australia.

The euro was down 0.4 percent at about $1.4640, on its way to testing a six-month low around $1.4570 hit last week.

Sterling fell 0.5 percent to $1.8040 after Britain's finance minister told a newspaper the country's economic downturn might turn out to be the worst in 60 years.

(Additional reporting by Fayen Wong in PERTH, editing by Dhara Ranasinghe)