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

Taiwan's benchmark TAIEX index <.TWII> soared 6 percent, taking gains to 13 percent in just two days as investors see a wide-reaching deal coming later in the year as spurring heavy Chinese investment in the island, especially in financial firms.

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

The Australian dollar, seen as the currency market's bellwether for risk-taking, struck a seven-month peak 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.

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.

Bank earnings are coming out fine and investors increasingly believe the result of the U.S. banking sector's stress test will be tolerable, said Kim Hak-kyun, an analyst at Korea Investment & Securities in Seoul.

The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 3.7 percent, its highest level since mid-October and taking its two-month rally to 44 percent from the low hit in early March. Financial and technology shares powered the rise.

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 climbed 0.7 percent to $0.7353 and hit 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 0.2 percent against the yen to 99.45 yen, but the euro was up 0.3 percent at $1.3320.

Government bonds lost more ground as investors feared missing out on the equity rally and shifted funds away from safe-haven holdings.

In Korea, government bond futures shed 0.31 point to 111.25, pulling back from a six-week high hit last week on hopes that the country may soon be included in the Citigroup World Government Bond Index, attracting money from funds following the benchmark.

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 10 basis points at 4.27 percent.

(Editing by Tomasz Janowski)

Japan Citigroup