Oil price hits seven-week low below $125, supports stock rally

A retreat in oil prices and signs of improved confidence in the Unites States financial sector also pushed the U.S. dollar to a one-month high against the yen.

Adding to a sense of short-term relief, U.S. President George W. Bush dropped a threat to veto a housing-bailout bill that would extend a potential $25 billion lifeline to the embattled mortgage lenders Fannie Mae and Freddie Mac

The drop in oil and the potential housing rescue together have stopped cold a popular trade in which dealers would simultaneously bet against the financial sector and put their money in the energy sector. The unwinding of this trade has accelerated the upward momentum in equities.

However, uncertainty loomed as to whether economics were supporting the global stock market rally, particularly after data showed Japanese exports fell for the first time in five years.

"The fundamental issue is oil, and this is helping the market become cautiously optimistic," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments in Tokyo. "There's a sense that investors still lack confidence, but the fall in oil has sparked some buying, and with banks likely having hit bottom, optimism may grow."

Japan's Nikkei share average rose about 1 percent to its highest level since July 2, led by sectors most sensitive to fuel prices, such as automakers.

Shares in the Asia-Pacific region excluding Japan edged up 0.6 percent to the highest level in more than three weeks, having bounced 8 percent from a 16-month low plumbed last week.

Hong Kong's Hang Seng was up a modest 0.2 percent, powered almost entirely by gains in the financial sector. Lower fuel prices were certainly a boon to shares of Cathay Pacific, which rose 4.2 percent.

South Korea's KOSPI jumped 2 percent, led by shares of Samsung Electronics on market chatter the company will announce share buyback plans. The company will report its results on Friday,

"There is a good chance that Samsung Electronics will unveil share buyback plans tomorrow, as their share prices have suffered steep falls during the latest bearish run," said Suh Do-won, an analyst at Hanwha Securities in Seoul.

CRUDE REALITIES

Crude prices drifted lower to $124.28 a barrel more than $22 below the all-time high hit just two weeks ago. A U.S. government report overnight showed a large buildup in oil supplies, reinforcing concerns that energy demand is deteriorating under the weight of an economic slowdown and high prices.

Lower oil prices have pushed up the U.S. dollar, which has also benefited recently from Federal Reserve officials who have suggested interest rate increases are needed sooner rather than later to quell inflation.

The dollar hit a one-month high against the yen just below 108 yen The euro was at $1.5693 falling further from its record high above $1.60 reached last week.

"The outlook for the dollar is intertwined with oil prices," said Ashley Davies, currency strategist with UBS in Singapore. "The recent weakness in oil could be the result of declining demand and as such could be more than a dip or at least a very long, drawn out dip," he said in a note.

Strength in equity markets has been sucking capital out of major government bond markets, often a place where investors stash money in times of high volatility.

However, Japanese government bonds recovered after earlier sliding for a third straight day. A solid auction of 20-year bonds as well as much lower-than-expected Japanese trade surplus figure supported prices.

The benchmark 10-year yield which moves inversely to the price, slipped 1.5 basis points to 1.625 percent, though it is still up from a three-month trough of 1.530 percent hit last week.

State Street's ABF pan-Asia bond index fund, a barometer of local-currency government and quasi-government bonds in Asia, has fallen 6 percent since mid April and was down 0.2 percent on Thursday.