July 23, 2008 / 2:36 AM / 12 years ago

Oil falls helping to lift Asia stocks

HONG KONG (Reuters) - Oil prices on Wednesday slid $20 below an all-time high hit two weeks ago, helping to lift Asian stocks and weigh on government bonds as investors cautiously reached for higher returns as well as more risk.

The dollar held gains made the previous session after top U.S. officials, including Treasury Secretary Henry Paulson, gave it a verbal lift.

Crude was down 0.5 percent to $127.82 a barrel after having closed on Tuesday at its lowest since June 5, partly on fears about waning U.S. demand. That has in turn eased immediate concerns about the burden of high energy costs, though soft consumer demand continues to be a worry.

On the earnings front, with the results from some Wall Street banks not as dire as analysts had predicted, investors broadened their focus to other sectors, with announcements on Friday expected from Samsung Electronics Co (005930.KS) and Honda Motor (7267.T).

“We’re just seeing a temporary bright patch,” said Yoku Ihara, manager of the investment information department at Retela Crea Securities in Japan. “It’s still far too early to let down our guard.”

Japan's Nikkei share average .N225 rose 1.5 percent to the highest in two weeks. If the index keeps its gains on the day, it will be the first time since April that the Nikkei has had back-to-back gains of at least 1 percent.

Outside of Japan, shares in the Asia-Pacific region .MIAPJ0000PUS climbed 2.3 percent to the highest in three weeks, according to an MSCI index.

Hong Kong's Hang Seng .HSI rose 2.2 percent to a one-month high.

Despite investors’ increasing willingness to buy riskier assets lately, high inflation continues to stalk Asian markets.

The combination of rising price pressures and slowing growth was a big factor in the nearly $4 trillion in market capitalisation that has evaporated since November, Morgan Stanley said.

Underlying inflation in Australia was at the highest in almost 17 years in the second quarter, suggesting the central bank may have to keep interest rates where they are despite threats to growth.

Consumer prices in Vietnam, whose stock market is one of the worst performers this year, are expected to rise 25 percent this year, double last year’s pace, with the country seen running an $18.8 billion trade shortfall, a state-run newspaper said.

VALUATIONS PROVIDE SUPPORT

JPMorgan slashed its 2008 targets for Asia-Pacific stock markets across the board on Wednesday by an average of 13.5 percent, though still was looking for double-digit 12-month returns from every country in the region, excluding Japan.

Cheap valuations will likely support equity prices over the next year, with top three most inexpensive markets tracked by JPMorgan’s valuation model — Taiwan, Philippines, Australia — located in Asia.

“The consensus return-on-equity forecasts for the next three years are much higher than the historic average for each market,” said Adrian Mowat, JPMorgan’s chief equity strategist for emerging markets and Asia Pacific. “While this indicates a high degree of optimism it can also be argued that this suggests that the risks to valuations are on the upside,” he said in a note.

Yields on safe-haven government bond yields, which move inversely to prices, edged higher as the MSCI all-country world equities index .MIWD00000PUS appeared poised for a sixth straight day of gains, the longest string since May.

The benchmark 10-year U.S. Treasury yield ticked up to 4.11 percent, up a basis point from late Tuesday in New York and 8 basis points higher on the year.

The 10-year Japanese government bond yield rose 2 basis points to 1.63 percent.

The U.S. dollar stayed firm, holding much of the ground gained against the euro and yen the previous day Paulson said a strong dollar was “really very important,” a variation on his usual comments about the currency.

“The dollar broke through some key levels and has upside momentum,” said Motonari Ogawa, director of forex trading at Barclays Bank in Tokyo. “But Japanese exporter selling could emerge at these levels, and it won’t be a one-way rise for the dollar,” said Ogawa.

The dollar edged down 0.1 percent at 107.20 yen. The euro was little changed at $1.5795 and flat against the yen at 169.33, not far from a record high 169.91 yen hit on Monday.

Additional reporting by Elaine Lies and Shinichi Saoshiro in TOKYO; Editing by Lincoln Feast

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