* Market unease over China lifts yen, but euro resilient
* Treasury prices up as investors go for lower risk assets
* China losses shake fragile economic confidence (Updates to U.S. markets close)
NEW YORK, Aug 19 (Reuters) - U.S. stocks rebounded and oil closed above $72 a barrel on Wednesday after data suggested a recovery in U.S. oil demand, a surprise for investors who earlier were fretting over a sharp slide in Chinese equities.
A U.S. government inventory report showed a huge drop in crude supplies last week, boosting oil futures by more than $3 a barrel and lifting Wall Street sentiment that had turned dour after a 4.3 percent a drop in the Shanghai Composite Index .SSEC.
The drop took losses on the key Chinese index to 20 percent over the past two weeks, a plunge hard for investors to ignore considering China’s role in any global recovery.
Copper fell to its lowest level in just over two weeks, and government debt prices in Europe and the United States rose as investors sought havens in less risky assets.
But oil reversed early losses after the U.S. Energy Information Administration (EIA) said crude stocks fell by 8.4 million barrels last week, confounding analysts’ expectations for a rise of 1.3 million barrels. [EIA/S]
“I think these (demand) changes are reflective of an improving economy, but one must be cautious because these changes are versus year-ago weak numbers,” said API chief economist John Felmy.
The decline in crude stocks was caused by rising production in refineries but also by a sharp drop in oil imports, with traders holding more inventories in tankers offshore as they await higher prices. [ID:nN19525271]
Still, the news lifted U.S. stocks that had fallen about 1 percent earlier in the session. The S&P Energy index .GSPE gained almost 2 percent, making it the top sector performer. Exxon Mobil XOM.N closed 2.3 percent higher while Chevron CVX.N gained 1.8 percent.
“Oil is helping us,” said Rick Meckler, president of LibertyView Capital Management in New York. “It’s a big part of the index and energy companies have helped turn this market before.”
The Dow Jones industrial average .DJI ended up 61.22 points, or 0.66 percent, at 9,279.16, while the Standard & Poor's 500 Index .SPX gained 6.79 points, or 0.69 percent, to 996.46. The Nasdaq Composite Index .IXIC rose 13.32 points, or 0.68 percent, to 1,969.24.
European equities ended lower after a choppy session, with weaker financial and automobile stocks outpacing a rise in oil and gas shares. But oil producers helped Britain’s leading share index to end slightly higher.
The FTSEurofirst 300 .FTEU3 index of top European shares closed 0.3 percent lower at 931.98 points.
The dollar fell 0.7 percent against the Japanese currency JPY=, to 93.98 yen, after China's stock market slide raised concerns about the strength of a global recovery, increasing demand for safe-haven assets.
But the recovery in U.S. equities later helped higher-risk currencies recover losses, and the euro rose 0.7 percent to $1.4236, on track for its biggest daily rise against the dollar in more than two weeks.
The spike in oil prices also helped higher-risk assets and currencies recover losses sparked by China’s stock market.
“Negative sentiment hasn’t disappeared but it has abated, with both the S&P and Dow paring losses,” said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. “That gave the market a chance to push the euro higher.”
The benchmark 10-year U.S. note US10YT=RR, meanwhile, was up 14/32, with the yield at 3.4646 percent, down from 3.517 percent on Tuesday's close.
Emerging market stocks ended practically unchanged according to an MSCI index .MSCIEF. (Additional reporting by Walter Brandimarte; Editing by Leslie Adler)
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