Asian shares rose to their highest in seven months while the safe-haven dollar extended its decline on Monday, but warnings about an impending turnaround are growing amid weak corporate results and views that any global recovery will only be gradual.

For now, traders focused on a smaller-than-expected number of job losses in the United States that reinforced expectations that the global economy, while still weak, may have hit bottom. Increased optimism about the global financial system is also feeding the rally.

European shares were set to gain ahead of results from bellwether HSBC <0005.HK>, while oil prices retreated a tad from the 6-months highs above $58 a barrel hit on Friday.

The gains in stock markets -- with the MSCI's index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> up 52 percent since their 2009 low hit in early March -- are also sparking a plunge in risk premiums in Asian credit levels.

The index gained 0.7 percent on Monday as of 0635 GMT (2:35 a.m. EDT) marking a sixth consecutive session of gains. Current levels are still some 50 percent below the record high for the index hit in early November 2007.

But some analysts are warning stock markets may be due for a pullback, given that corporate results remain weak, as seen by the steep loss announced by Toyota Motor Corp <7203.T> on Friday, while any recovery in the global economy is unlikely to be swift.

It seems that money inflows in Asia have started to slow down and there is profit taking around the region. I believe the market could see its half-year peak before the end of May, said Steve Cheng, associate director at Shenyin Wanguo.

Helping inspire investors was data on Friday showing U.S. employers cut a smaller-than-expected 539,000 jobs in April, even though the unemployment rate soared to 8.9 percent, the highest since September 1983.

The rally in U.S. banking shares after the release of results of stress tests in the sector is also feeding the rally.

Another key component of the rally in Asia has been signs of an economic recovery in China, with the country set to post key data this week including exports and industrial output.

China on Monday said it fell deeper into deflation in April, but economists expressed confidence that prices will be rising again before the end of the year.

Japan's Nikkei average <.N225> roes 0.2 percent, though it had fallen earlier on a 4.8 percent plunge in shares of Toyota after the automaker forecast a bigger-than-expected $8.6 billion annual loss after the close of markets on Friday.

Hong Kong's <.HSI> and Taiwan's <.TWII> main indexes each gained nearly 1 percent, but markets in Shanghai <.SSEC>, Sydney <.AXJO> and Singapore <.FTSTI> fell.

WORST OVER?

The shift toward risk has been especially evident in regional credit markets where the cost of insurance against defaults have fallen sharply, indicating increased confidence especially in high-yield.

The Asia iTraxx index of junk bonds outside Japan has tumbled to below 800 basis points from the 1,200-1,300 points just at the end of March when the market was still suffering from months of little to no liquidity.

The equivalent index for Asian investment-grade fell last week to below 200 basis points for the first time since October 1, and is now well below the yearly high of 459 points hit in March.

Still, only higher-rated Asian issuers have been able to sell debt this year, indicating some caution on the part of investors.

Other markets are showing signs of improved demand for risk. Safe-haven demand for the dollar has waned, with the U.S. currency index <.DXY> on Monday hitting a four-month low before later trimming losses.

Higher-yielding currencies have been in favor instead. The euro hit a seven-week high at $1.3670 on trading platform EBS at one point, although it later trimmed its gains to stand at $1.3630, little changed from late U.S. trading on Friday.

The New Zealand dollar climbed to its highest in six months above $0.6100 and the Australian dollar briefly struck a fresh seven-month peak at $0.7714 before slipping to $0.7671.

Oil has also benefited from the improved confidence about the global economy, sending futures prices to a six-month high above $58 a barrel on Friday, up by around 70 percent from February lows below $34.

On Monday, U.S. crude futures fell 50 cents to $58.13.

Still, analysts are also warnings of a possible pullback, especially in light of signs of rising inventories.

Oil prices are driven by perceptions that the economic outlook is less pessimistic that previously thought. But the growth numbers we could be seeing from developed economies may not justify such price levels, said David Moore, a commodities strategist at Commonwealth Bank of Australia.

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