Asian stocks punched to a seven-month peak on Monday, fueled by confidence the global economy is recovering faster than expected and a further jump in Taiwanese shares on hopes for an influx of Chinese investment.

Taiwan's benchmark TAIEX index <.TWII> soared 5.6 percent, taking gains to 12.8 percent in just two days as investors see a wide-reaching deal coming later in the year that would spur heavy Chinese investment in the island, especially in financial firms. <.TW>

The surge in Taiwan added to the broad gains across Asia as evidence has mounted that global trade is starting to pick up, highlighted by brokerage CLSA's gauge of Chinese manufacturing activity rebounding to a nine-month high in April.

Investors have largely brushed aside worries that the global H1N1 flu outbreak could turn into a serious pandemic.

The flu fears seem to be fading as the danger of it spreading seems to be lower now. On the other hand, we have China's PMI data, which seems to signal continued recovery for the economy, yet another reason to stay bullish, said Castor Pang, strategist with Sun Hung Kai Financial in Hong Kong.

The Australian dollar, seen as the currency market's bellwether for risk-taking, struck a seven-month peak. Oil and gold prices edged up, while safe-haven government bonds retreated.

Data last week in Asia showed South Korean exports and industrial production both improving more quickly than expected, suggesting that regional exporters are needing to step up activity after having aggressively slashed inventories of goods.

The U.S. Institute for Supply Management's factory survey on Friday also showed a jump in the new orders index, an important leading indicator adding to the evidence of a recovery taking shape.

The global manufacturing cycle appears to be gaining momentum, said economists at Societe Generale in a note to clients.

Investors are also feeling more confident that the U.S. financial system has already suffered the worst of its crisis and is getting healthier, just before the government releases the results of stress tests later this week.

The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 4.6 percent, its highest level since mid-October and taking its two-month rally to 45percent from the low hit in early March. Financial and technology shares powered the rise.

Foreign investors have seized on the rally as an opportunity to allocate more funds to Asia. Fund tracker EPFR Global said that Asia ex-Japan equity funds were the main emerging markets money magnet during the week ending last Wednesday.

On Friday the U.S. S&P 500 <.SPX> edged up 0.5 percent, and S&P futures were pointing to a further rise later in the day.

Trading was active even with Japanese financial markets closed on Monday for the first of three straight holidays, part of the country's Golden Week break. Many other markets in the region reopened after labor day holidays.

AUSSIE RUN EXTENDS, KOREAN BONDS FALL

The Australian dollar was up 0.7 percent at $0.7353 after hitting a seven-month high of $0.7390 as market players favored the currency still offering a 3 percent yield in a world where U.S. and Japanese short-term yields are pinned near zero.

The dollar edged up 0.3 percent against the yen to 99.44 yen but was down against most other major currencies as safe-haven flows switched gears. The dollar index <.DXY> was down 0.2 percent, while the euro was up 0.1 percent at $1.3300.

The dollar's losses and bets the global economy is slowly refleating lifted commodity prices. U.S. crude oil inched up 25 cents to $53.45 a barrel, while gold was up $8 an ounce at $893.80.

Government bond yields and swap rates rose further as investors feared missing out on the equity rally and shifted funds away from safe-haven holdings.

In Korea, government bond futures shed 0.55 point to 111.01, the biggest drop in six weeks, as the equity rally and signs of economic improvement offset hopes the country may soon be included in the Citigroup World Government Bond Index.

Last week South Korean lawmakers approved a plan that would give tax advantages to foreign investors in local currency bonds, a step that could pave the wave for it to be included in the Citigroup index tracked by investors managing some $1 trillion in debt.

Benchmark five-year Korean bond yields were up 16 basis points at 4.33 percent and taking the two-day rise to 26 basis points. Korean swap rates jumped even more quickly, causing swap curves to steepen.

(Additional reporting by Parvathy Ullatil in Hong Kong and Kim Yeon-hee in Seoul; Editing by Tomasz Janowski)

China Japan Investment Citigroup