World stocks hit life high, oil eyes record

By Natsuko Waki

LONDON (Reuters) - World stocks hit a lifetime peak on Monday as a fresh bout of corporate takeover activity helped ease concerns about oil prices which approached record highs.

While most global markets proved resilient to last week's housing and credit-related woes, the dollar remained on back foot, hitting its lowest in more than 20 years against sterling and the New Zealand dollar.

European shares raced towards last week's 6-1/2 year peak, defying export-damaging strength of the euro and an inflationary rise in energy prices. Banking stocks rallied after a group led by Royal Bank of Scotland (RBS.L) revised its offer for Dutch bank ABN Amro AAH.AS.

"M&A activity is far from over, and it's buoyant in every sector," said Jean-Francois Virolle, chief strategist at Global Equities in Paris. "So far, rising interest rates have had a limited impact, and it could take a while before we see the recent frenzy slow down."

Upbeat second-quarter earnings boosted U.S. stocks to record highs on Friday, helping calm fears housing-related fallout could trigger a credit crunch and spread to the wider economy.

The MSCI world equity index had risen as high as 415.28, up nearly 13 percent this year. The pan-European FTSEurofirst 300 index .FTEU3 rose towards last week's 6-1/2 year high.

Credit markets also recovered on Monday, with the iTraxx Crossover index, a barometer of European credit sentiment, slightly tighter.

Monday starts one of the busiest weeks for U.S. corporate earnings which will also feature a key testimony by Federal Reserve Chairman Ben Bernanke.

U.S. stock futures were pointing to a slightly weaker open on Wall Street.

OIL AND INFLATION

The booming M&A activity and carry trade from low into high-yielding currencies and assets stem from flush global liquidity conditions, but this benign environment could end quickly if inflation rises globally.

"Accelerating inflation in the U.S. will reduce the Fed's ability to cut rates in a crisis. Accelerating inflation in the rest of the world, in particular in Asia, would lead central banks to slow the pace of reserve accumulation and their printing presses," State Street said in a note to clients.

One factor which could push up inflation is surging energy prices. London Brent crude had risen above $78 a barrel, less than $1 away from an all-time peak, after a rush of fund investment gathered pace on signs of increasingly tight North Sea crude markets.

For now however, inflation expectations are contained in the United States, with the Federal Reserve only focusing on core prices, which strip out food and energy prices.

Investors expect the Fed to leave interest rates on hold for the rest of the year, a factor weighing on the dollar in recent weeks as other major central banks tighten.