EMERGING MARKETS-Mexican peso hits 10-week high on recovery hopes

    * Mexico's Q1 economic activity contracts less than expected
    * Brazil's posts record current account surplus in April
    * Investors turn "under-weight" on Brazil's real - JPMorgan
    * Chile's LATAM Airlines files for bankruptcy

    By Susan Mathew
    May 26 (Reuters) - Mexico's peso rose on Tuesday, hitting a
10-week high after economic activity contracted less than
expected in the first quarter, while broader sentiment was
lifted by hopes of a global economic recovery as countries
further eased pandemic-driven lockdowns.
    The peso jumped 1.4%, extending gains to a seventh
straight session after the GDP data, but as a coronavirus
lockdown was applied only in late March, the second quarter is
expected to bear the brunt of the shutdown in business activity.

    "The peso should be well placed to benefit from any
improvement in global growth momentum and EM risk appetite,
helped by its appealing short term valuations improving balance
of payments dynamics," said global FX strategists at JPMorgan.
    Surging copper prices lifted top producer Chile's peso
, while a recovery in oil prices led the Colombian peso
 to its highest since early March.
    Brazil's real surged 1.8% to a four-week high
as central bank data showed the country posted a record current
account surplus in April.
    The real has recently tried to rebound from record lows on
the back of higher commodity prices, but remains about 25% down
on the year amid a federal investigation into President Jair
Bolsonaro as well as a spree of ministerial resignations.
    Bolsonaro has also been criticized for his handling of the
coronavirus outbreak, with Brazil now the second-worst hit
country in terms of the number of infections.
    JPMorgan analysts said investors had turned "under-weight"
on the real for the first time since September 2018, but they
still see the currency outperforming by the end of the year as
financial markets focus on "the significant cheapness of the
currency in the medium run."
    Regional stocks tracked Wall Street higher on hopes the
global economy could emerge from what is expected to be a deep
recession as countries reopened more businesses and on hopes of
a COVID-19 vaccine.
    Brazil's Bovespa hit an 11-week high, while Mexico's
main index rose 1.3%, extending gains to a third straight
session. 
    Chile's LATAM Airlines Group SA filed for U.S.
bankruptcy protection on Tuesday, becoming the world's largest
carrier so far to seek an emergency reorganization amid the
coronavirus outbreak.
    
    Key Latin American stock indexes and currencies at 1056 GMT:
   
     Stock indexes              Latest      Daily % change
 MSCI Emerging Markets            929.68                    2
                                          
 MSCI LatAm                      1785.09                 2.82
                                          
 Brazil Bovespa                 86861.54                  1.4
                                          
 Mexico IPC                     36308.55                 1.33
                                          
 Chile SPIPSA                    3765.02                 0.36
                                          
 Argentina MerVal               41836.79                2.134
                                          
 Colombia Colcap                 1070.37                  1.2
                                          
                                                             
        Currencies              Latest      Daily % change
 Brazil real                      5.3594                 1.79
                                          
 Mexico peso                     22.2375                 1.33
                                          
 Chile peso                        798.7                 0.73
                                          
 Colombia peso                   3723.41                 1.42
 Peru sol                         3.4178                 0.23
                                          
 Argentina peso (interbank)      68.2600                -0.12
                                          
 
 (Reporting by Susan Mathew in Bengaluru)
  

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Stocks gain as German survey fuels optimism; dollar firm

LONDON (Reuters) – Stocks edged higher on Monday after a survey showed German business morale rebounded in May, boosting optimism around economic re-openings, although caution prompted the dollar to snap a rare losing streak.

MSCI’s gauge of world stocks gained 0.32%. The pan-European STOXX 600 index climbed 0.8%.

Lockdown measures introduced in mid-March have put the global economy on track for a recession this year. Only unprecedented stimulus by global central banks held up world markets in recent weeks.

With nervous investors wary of adding to their equity holdings over concerns on what a post-lockdown world would look like, Germany’s Ifo institute survey for May gave some relief.

Its business climate index rose to 79.5 from a downwardly revised 74.2 in April, higher than a Reuters poll had forecast, and fueling optimism about the outlook of Europe’s biggest economy after a drop in the first quarter

“Today’s Ifo index echoes more real-time signals that economic and social activity has started to pick up significantly since the first lifting of the lockdown measures in late April,” ING economists said in a note.

“In short, the low point of the slump should now be behind us and there even is the chance for a short-lived strong rebound in the coming months.”

But with financial markets in Singapore, Britain and the United States closed for public holidays on Monday, market moves were relatively small and held within well-worn ranges.

U.S. stock futures gained 1%. MSCI’s index of Asia-Pacific shares outside Japan was 0.3% higher on thin volume.

DOLLAR GAINS

The bullishness in the stock markets contrasted with caution in currency markets, where the dollar ended a rare weekly loss to rise to a one-week high against its rivals.

The dollar, which tends to behave like a safe-haven asset during market turmoil and political uncertainty, gained after China’s move to impose a new security law on Hong Kong heightened concerns about the stability of the city and global trade prospects.

Investors were rattled on Friday when Beijing announced details of the security legislation, which critics see as a turning point for the territory.

Sino-U.S. ties have worsened since the coronavirus outbreak, with the administrations of President Donald Trump and President Xi Jinping trading barbs over the pandemic, including accusations of cover-ups and lack of transparency.

“Rising tensions between the U.S. and China around Hong Kong, trade policy and who is responsible for the 2020 economic dislocation are threatening to end the post March-trough rally,” said Perpetual analyst Matthew Sherwood.

Bond markets were stable with Italy’s 10-year yield at 1.60%, just off six-week lows hit on Friday, and safe-haven German 10-year yields down 1 basis point at -0.50%.

Meanwhile, U.S. crude oil rose 32 cents, or 1%, to $33.57 a barrel. Brent crude was up 9 cents, or 0.26% higher, at 35.22. [O/R]

Spot gold was off 0.3% at $1,729.2 an ounce.

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Rudderless after a rally, stock markets look for next catalyst

LONDON/NEW YORK (Reuters) – Global equity markets have shuffled up about 1% this month despite the world starting to re-open after the coronavirus-driven lockdowns and U.S. and European economic data showing glimmers of a recovery.

The sideways movement is in sharp contrast to the roughly 30% rally in late March and April, when investors were able to shrug off far more dire economic data and look towards recovery backed by government support.

In some ways, not much has changed in the world’s understanding of the coronavirus and its economic impact. Some investors, economists and public health experts have been warning for weeks that re-opening will be slow, vaccines will take months and the recovery will be prolonged.

And yet, investors appear to be taking heed only now.

In interviews, investors said the explanation partly lies in the failure of the market’s collective wisdom. Stock markets misread how fast growth may rebound. And now they need a new catalyst, such as a vaccine or substantial new stimulus, before they can decide whether to flee or hold the course. But it is proving to be elusive.

“Markets have essentially been range bound for more than a month now waiting for a new driver to emerge,” said Mohamed El-Erian, chief economic advisor at Allianz. He said that positive news on reopenings and vaccines were insufficient to compensate for the string of negative data and concerns about the sharpness of the recovery.

The market’s conundrum underscores a larger predicament facing global policymakers in the battle against the coronavirus. The $15 trillion-plus pledged in global stimulus inflated stock markets in April, as investors took heart that governments will not let the global economy completely melt down. But while the money kept economies afloat, it cannot engineer a recovery.

For that, the virus must first be brought under control.

(GRAPHIC: Dead cat bounce? – here)

TUG OF WAR

Kasper Elmgreen, head of equities at Europe’s largest asset manager, Amundi, described markets as caught in a “tug of war” between bull and bear forces.

Elmgreen described the bullish forces as “the extraordinary fiscal and monetary stimulus that came much faster and more forcefully than during the past crisis.”

On the other side, he said is persistent uncertainty over the pace and shape of economic and earnings recovery. Markets are being premature in pricing a return to normalcy even next year, he added.

“If there is light at the end of the tunnel, corporates are not seeing it,” said Elmgreen.

Indeed, measured against forward earnings, European and U.S. equities are trading back at early-March levels, when the COVID-19 impact was yet to be felt.

But with the world economy predicted to witness its biggest contraction since the Great Depression, U.S. and European earnings should decline 40-45% in the second quarter, Refinitiv data shows.

Influential U.S. investors David Tepper and Stanley Druckenmiller recently described markets as overvalued and with terrible risk-reward. Druckenmiller dismissed V-recovery hopes as “a fantasy”.

(GRAPHIC: Rebound in global equity valuations – here)

EARLY WARNINGS

To be sure, many investors and policymakers initially believed the economic impact of the crisis could be brief, supporting the market’s optimism.

But the stock market has a history of missing warning signals. In the current crisis, too, signs that it was not going to be smooth sailing got downplayed.

Paul O’Connor, head of multi-asset at Janus Henderson, said April “wasn’t a rally that said the world is feeling better about growth or a reappraisal of the macro environment.”

Nervousness was evident all along in bond yields that didn’t rise, gold’s 7% price gain and investors’ refusal to deploy the $4.7 trillion stashed in U.S. money market funds, he noted.

There were other loud warnings, too.

Anthony Fauci, the top U.S. infectious disease expert, said as early as March 3 that it would take at least 12-18 months until a coronavirus vaccine is ready to be deployed. On April 7, former Federal Reserve Chairman Ben Bernanke warned against expecting a quick recovery, saying it was likely that activity will only be restarted gradually and may need to be slowed again if the virus resurges.

CUTTING RISK

The sobering calls are coming true. Experience of countries in Asia, which had dealt with the virus for longer than the West, show that even after months of lockdown, consumers won’t necessarily head out en masse to dine or shop, reducing the likelihood of a V-shaped recovery.

A slow, U-shaped recovery, or worse, a W-shaped double-dip is now expected by 75% of the investors polled by Bank of America Corp’s  securities division.

“We thought central bank interventions had taken out some of the tail risks in the market,” said Wouter Sturkenboom, who helps formulate investment strategy for $350 billion in client assets at Northern Trust Asset Management.

Sturkenboom added risk, including equities, to his portfolio during the March rout and stayed overweight through April. But last week he cut the weighting of risky assets by 7% in favour of cash and cash-like assets. 

“We worry that the initial bounce in growth will be smaller and more gradual than hoped for. The risk of a downside surprise looks about equal to the likelihood of an upside surprise at this point,” Sturkenboom said.  

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Asia shares set to fall as Sino-U.S. strains hit confidence

WASHINGTON (Reuters) – Asian shares were set for another retreat on Friday as U.S.-China tensions curbed investor risk appetite and caused global equity markets to stumble.

Hong Kong futures HSIc1 fell 1.59% and Nikkei futures NKc1 were trading below the Nikkei 225 index’s .N225 previous close, pointing to opening loss of 0.1%.

Australian S&P/ASX 200 futures YAPcm1 eased 0.13%.

Global equities pulled back after Beijing was set to impose new national security legislation on Hong Kong. The move drew a warning from President Donald Trump, who said the United States would react “very strongly” against it.

The back-and-forth between the world’s two largest economies stoked worries that the tensions could threaten “Phase 1” of a U.S.-China trade deal reached early this year.

That prompted Wall Street shares to slip from the two-month highs made in the previous session on hopes of a economic recovery as governments began to lift their coronavirus restrictions.

The majority of the 11 S&P sector indexes declined, leaving the main benchmark S&P 500 .SPX down 0.78%. Dow Jones Industrial Average .DJI finished down 0.41% and the Nasdaq Composite .IXIC fell 0.97%.

The U.S. dollar, seen as a safe-haven, rose amid those concerns. The dollar index =USD, which measures the greenback’s strength against six major currencies, was up 0.1%.

Spot gold XAU=, also typically seen as a risk-off option, was little-changed after losses of 1% as investors booked profits or opted for cash.

Brazil’s real BRBY jumped after the central bank said it was ready to increase support for the currency. The country is expected to soon become the second-worst hit globally by the pandemic as cases approach 300,000.

Crude oil futures LCOc1 rose to their highest since March, as recovering demand and production cuts offset investor jitters seen in other markets.

“Thus far, traders were right to call a trough in global demand in April,” AxiCorp Chief Global Markets Strategist Stephen Innes said in a daily note. “Still, oil prices will remain sensitive to any hint that the easing of global lockdowns might result in the 2nd wave of COVID-19 infections and, therefore, a more protracted impact on demand.”

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EMERGING MARKETS-Brazil's real jumps on central bank reassurance

    * Brazil ready to increase FX intervention -central bank
chief
    * Currencies of oil-exporters Mexico, Colombia rise
    * Argentina creditor says default hard to avoid on Friday 

 (Adds comments, updates prices)
    By Shreyashi Sanyal and Susan Mathew
    May 21 (Reuters) - Brazil's real jumped on Thursday after
the central bank said it remained ready to increase support for
the currency and Mexico's peso hit its highest in nearly two
months as oil prices rallied.
    But as the novel coronavirus speeds through the region,
analysts said the Latin American economy may shrink at a record
pace this year and take at least two more years to recover.
   
    Brazil is seen soon becoming the second-worst hit globally
as the number of cases approaches 300,000, while Mexico reported
a surge in cases after reopening its economy. 
 
    Currencies of Mexico and Colombia both rose
around 1.3% as recovering demand lifted oil prices.

    Brazil's real jumped 2% after central bank President
Roberto Campos Neto said the bank would dip into its large pool
of foreign exchange reserves and continue intervening in the
currency market if needed. The currency has lost close to 30% of
its value against the dollar so far this year.
    Amid increasing political uncertainty in Brazil, the
government's remaining 'super minister,' Economy Minister Paulo
Guedes, has the full support of his team, a senior ministry
official said on Wednesday.
    Mexican President Andres Manuel Lopez Obrador said the
government was open to dialogue about rule changes in the
electricity sector that had sent the stock market plunging.
Mexico's IPC index fell 1%. 
    Most Latam bourses rose with Brazil's benchmark index
 hitting a three-week high.
    "We think Latin America offers the most value in EM equities
– Bovespa likely the best rebound candidate," said Goldman Sachs
strategists in a note.
    "Latin America's underperformance versus the rest of EM
since January has opened up significant value across assets on
both a relative and an absolute basis," they said, also
highlighting tail-winds from an expected pick-up in commodity
prices in the second half of 2020.
    Argentina's peso slid deeper into record low
territory as the government probably cannot avoid defaulting on
a bond payment due on Friday. But one of its creditors, Greylock
Capital, said a deal to restructure $65 billion in foreign debt
should still be achievable.
                
    Latin American stock indexes and currencies at 1946 GMT:
    
      Stock indexes               Latest       Daily %
                                               change
 MSCI Emerging Markets               929.82        -0.18
                                             
 MSCI LatAm                         1675.76         2.32
                                             
 Brazil Bovespa                    83067.44         2.15
 Mexico IPC                        35650.45        -1.05
 Chile IPSA                         3755.08         0.67
                                             
 Argentina MerVal                  41389.04        3.969
                                             
 Colombia COLCAP                    1068.45        -0.36
                                             
                                                        
         Currencies               Latest       Daily %
                                               change
 Brazil real                         5.5776         1.99
                                             
 Mexico peso                        22.9010         1.27
                                             
 Chile peso                           802.7         0.00
                                             
 Colombia peso                      3759.97         1.21
 Peru sol                            3.4108        -0.30
                                             
 Argentina peso (interbank)         68.0800        -0.12
                                             
 
 (Reporting by Shreyashi Sanyal and Susan Mathew in Bengaluru;
Editing by Andrea Ricci and Grant McCool)
  

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Shares lose footing, oil marches on

LONDON (Reuters) – Equity markets slipped on Thursday on concerns about the long-term impact of the new coronavirus and simmering U.S.-China tensions, though those worries couldn’t stop oil prices from marching to a 2-1/2 month high.

The London .FTSE, Frankfurt .GDAX and Paris .FCHI bourses and Wall Street futures were all 0.7%-1% lower in early trading, while the euro EUR= and pound GBP= both wilted as the dollar snapped a four-day losing streak.

It was also a big day for data and central bankers. Purchasing manager index surveys (PMIs) from Germany and France had already confirmed that economic activity has begun to return, though they were far from stellar.

Despite better-than-expected euro zone-wide figures Germany’s improvement undershot analysts’ forecasts, and it was the third month in a row that the surveys were firmly in economic contraction territory.

“While we have seen resilience in European markets there is still caution, and we can’t seem to get over the peaks (in equity markets) that we saw at the end of last month,” said CMC Markets’ senior analyst Michael Hewson.

“We have got PMIs improving but you would expect that because lockdowns are being eased. They are still rubbish, they are just less rubbish than they were in April.”

Italy and Spain’s government borrowing costs also rose slightly as bond market investors waited for bond sales from both and for more details on a proposed 500 billion euro ($550 billion) EU coronavirus recovery fund.

The Franco-German driven plan would push the bloc in the direction of joint financing but has been met with resistance from a number of other northern European countries who want the aid to be in the form of loans to be repaid rather than grants.

The 10-year BTP yield was up 1.1 basis points at 1.64%, not far from the 1.59% low it touched on Tuesday, while Spanish yields rose 2.4 bps at 0.73%.

OIL ON THE BOIL

U.S. weekly jobless claims are seen coming in later at a seasonally adjusted 2.4 million, according to a Reuters survey of economists – high but well off the record 6.867 million seen at the end of March. 

There will also be a raft of U.S. Federal Reserve speakers, including Fed chair Powell, and two big emerging market central banks – Turkey and South Africa – are expected to cut their interest rates again.

In Asia overnight, Japan’s Nikkei stock index .N225 slid 0.2% after data there showed the country’s exports collapsed 21.9% in April. Another dismal trade report came from Korea where 20-day exports declined by 20.3% year-on-year and imports fell by 16.9%, though Korean stocks still ended the day higher.

Shares in China had ended down 0.2% after more sparring with Washington over the coronavirus and Hong Kong and Taiwan emerged. Friday’s annual National People’s Congress (NPC) meeting was also looming after a 2-1/2 month delay due to COVID-19.

The focus will be on Premier Li Keqiang’s 2020 work report where he is expected to announce key economic targets and details on fiscal stimulus plans.

In the currency markets, the dollar climbed to $1.0956 per euro EUR=EBS and rose to $1.2291 against the British pound GBP=D3. The greenback also gained against the Australian AUD=D3 and New Zealand dollars NZD=D3, reflecting the cautious mood of the markets.

No such issues in the oil world though, where U.S. crude rose 1.9% to $34.09 a barrel and Brent jumped 1.8% to $36.39 per barrel. Both are now at the highest since early March on hopes that demand for fuel will see a robust global pick up.

U.S. crude inventories fell by 5 million barrels last week, against expectations in a Reuters poll for a 1.2 million-barrel rise, Energy Information Administration (EIA) data had showed.

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Oil gains, stocks rally on renewed recovery hopes

NEW YORK (Reuters) – Crude prices rose and a gauge of global equities broke out of a three-week trading range on Wednesday as investors bet on a rapid recovery from the coronavirus-induced recession.

Oil prices climbed 3%-4% on signs of improving demand and a drawdown in U.S. crude inventories, while a surge in Facebook Inc and Amazon.com Inc to record highs lifted the Nasdaq to within 5% of its all-time high.

U.S. Treasury yields were little changed and gold edged higher, but gains were limited as risk appetite improved.

The markets are expecting economic recovery sooner rather than later, though there is a risk the slowdown isn’t as temporary as some think, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

“There’s a view that as the economy reopens there hasn’t been, so far, a resurgence in the hospitalization rates and that perhaps some of the ‘worst-ever’ data that we’ve seen will soon be behind us,” Arone said.

MSCI’s gauge of stocks across the globe gained 1.40% to within 1 point of 500, after the benchmark was unable to climb past 495 the past three weeks.

The pan-European STOXX 600 index rose 0.98% to close just shy of a three-week high, led by the tech, chemicals and energy sectors.

On Wall Street, the Dow Jones Industrial Average rose 381.62 points, or 1.58%, to 24,588.48. The S&P 500 gained 50.34 points, or 1.72%, to 2,973.28, and the Nasdaq Composite added 185.64 points, or 2.02%, to 9,370.75.

Two-thirds of 223 fund managers surveyed by Bank of America reckon recent equity gains indicate a bear-market rally.

Federal Reserve policymakers re-upped a pledge to keep interest rates near zero until they are confident the U.S. economy is on track to recovery, a detailed summary of their most recent policy-setting meeting shows.

The 10-year Treasury notes fell 2.8 basis points to yield 0.6834%.

U.S. crude inventories fell by 5 million barrels last week, Energy Information Administration data showed, while Cushing, Oklahoma, stocks dropped by 5.6 million barrels. [EIA/S]

U.S. crude futures rose $1.53 to settle at $33.49 a barrel, while Brent gained $1.10 to settle at $35.75 a barrel.

The euro extended gains on Monday’s French-German proposal for a 500 billion euro common fund that could move Europe closer to a fiscal union.

The euro rose 0.59% to $1.0985 and the dollar index fell 0.445%. The Japanese yen strengthened 0.22% versus the greenback at 107.50 per dollar.

U.S. gold futures settled up 0.4% to $1,752.10 an ounce.

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Euro gains on EU recovery-fund plan, oil climbs

NEW YORK (Reuters) – The euro and European government debt rallied on Tuesday, lifted by a Franco-German proposal to fund grants for regions hit hardest by the coronavirus pandemic, while oil rose on growing demand as countries eased business lockdowns.

A gauge of global equity markets also moved up, though major European stock indices were lower and Wall Street traded mixed.

Gold prices rose as some investors sought the safe-haven asset on recession fears after a 30.2% decline in U.S. housing starts in April, the biggest percentage drop on record.

Permits for future construction tumbled, adding to data showing the pandemic will drive the deepest U.S. economic contraction in the second quarter since the Great Depression.

The euro rose 0.23% to $1.0937, and was up more than 1% against the dollar since the Franco-German plan for a 500 billion euro European Union recovery fund was announced Monday.

“The Franco-German proposals are ambitious, targeted and, of course, welcome,” European Central Bank President Christine Lagarde said of the plan, which would move the EU in the direction of a so-called “transfer union.”

The euro traded near a two-month high against the Swiss franc, and options markets showed fewer traders were now betting against it.

Spanish and Portuguese government bond yields fell after a big drop in Italian yields on Monday. France and Germany also proposed allowing the European Commission to borrow money in the EU’s name in financial markets while respecting the bloc’s treaties.

Europe’s STOXX 600 index slipped 1.2% after the worldwide surge in equity markets on Monday. But MSCI’s gauge of stocks across the globe gained 0.46%.

On Wall Street, the Dow Jones Industrial Average fell 76.13 points, or 0.31%, to 24,521.24. The S&P 500 gained 1.4 points, or 0.05%, to 2,955.31 and the Nasdaq Composite added 57.43 points, or 0.62%, to 9,292.26.

Federal Reserve Chair Jerome Powell said in testimony before lawmakers that the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March was “critical” to the Fed’s ability to expand credit to offset the economic blow from the coronavirus.

U.S. Treasury yields were lower. The benchmark 10-year yield was last down 2.4 basis points at 0.7176%.

Crude prices rose amid indications producers were cutting output and on signs of rising demand as lockdowns ease.

U.S. crude recently rose 2.04% to $32.47 per barrel and Brent was at $34.82, up 0.03% on the day.

Britain’s pound shrugged off the UK’s highest unemployment claims figures in nearly a quarter of a century, and a near 80% plunge in European new car sales in April contributed to 1.8% fall in auto sector shares.

Sterling trading at $1.2243, up 0.44% on the day.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.8% to two-week highs and Japan’s Nikkei added nearly 2%.

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Asia shares down on week as U.S.-China tensions rattle sentiment

TOKYO (Reuters) – Asian stocks edged up on Friday but were on course to end the week lower as deteriorating U.S.-China relations add to uncertainties over how fast economies can recover as they start to emerge from lockdowns.

Worries about confrontations between the two largest economies in the world eclipsed Chinese economic data, which showed its economy is gradually recovering from the shock of the coronavirus outbreak.

With China the first to relax lockdowns, global investors are closely watching it for clues on how long demand will take to bounce back, as other countries begin to ease their own anti-virus measures.

European stocks are expected to play catch-up with the late recovery in U.S. shares on Thursday, with pan-European Euro Stoxx 50 futures STXEc1 up 1.21%.

U.S. S&P500 futures ESc1 dipped 0.2% after the index gained 1.15% the previous day, recovering from a three-week low.

Japan’s Nikkei .N225 rose 0.6% but finished the week down 0.7% while mainland Chinese shares .SSEC were mixed.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.2% but has lost about 1.0% so far this week.

While many analysts regarded the weekly drop as a natural correction after a rally since mid-March, they are increasingly worried about rising U.S.-China tensions. U.S. President Donald Trump blames China for its handling of the COVID-19 disease that has killed more than 85,000 Americans.

Trump signalled a further deterioration of his relationship with China by saying he has no interest in speaking to President Xi Jinping right now.

He went so far as to suggest he could even cut ties with the world’s second-largest economy, a day after the U.S. federal pension fund delayed investment in Chinese shares in the wake of pressure from the White House.

The move fanned fears the confrontation between Washington and Beijing could escalate beyond trade to finance and other areas.

“The U.S.-China trade war was the biggest theme for markets last year. It will be a big concern if the conflict escalates beyond trade,” said Takeo Kamai, head of execution at CLSA.

China’s industrial output in April rose 3.9% from a year earlier, exceeding expectations for a 1.5% rise and expanding for the first time this year as its economy slowly emerges from its coronavirus lockdown.

But retail sales remained weak as unemployment rose.

“On the whole, the Chinese economy is improving and the industrial output figures suggest GDP could be positive in April-June,” said Wang Shenshen, senior strategist at Mizuho Securities. “But concerns about the U.S.-China relations are weighing on markets.”

In the currency market, the dollar steadied near a three-week high as Sino-U.S. tensions and worries about a second wave of coronavirus infections rattled investors.

In Asia, major currencies were little changed with the euro changing hands at $1.0806 EUR= and the yen at 107.19 per dollar JPY=.

Oil prices extended gains as data showed demand for crude picking up in China after the easing of curbs to stem the coronavirus outbreak, boosting hopes that the global supply overhang may start to fade.

U.S. crude futures traded 2.1% higher at $28.42 per barrel.

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EMERGING MARKETS-Latam markets rally; Argentina debt offer deadline eyed

    By Susan Mathew
    May 8 (Reuters) - Brazil's real firmed for the first time
this week, bouncing from last session's all-time lows, while
most other Latin American currencies also strengthened on Friday
on signs of easing tensions between the United States and China.
    Beijing said Sino-U.S. trade negotiators had agreed to
improve the atmosphere for the implementation of a Phase 1 deal,
days after President Donald Trump threatened to impose new
tariffs.
    "The last thing global investors need right now amid the
global coronavirus pandemic is a one-two punch from spiking
trade war risks," wrote Han Tan, market analyst at FXTM. 
    Data showing the U.S. economy lost fewer jobs in April than
feared due to the coronavirus crisis also lifted sentiment,
keeping the dollar at bay.
    Brazil's real rose 1.4% to 5.76 but the once
unthinkable 6.00 to the dollar was still in sight. The currency
plunged to new lows on Thursday after the central bank delivered
a deeper cut in interest rates than expected.
    The case for more cuts was made stronger on Friday by
official figures showing inflation in April plumbed over 20-year
lows.
    The U.S.-China optimism filtered through to commodity
markets, aiding gains in commodity-price reliant Latam markets.

    Currencies of Mexico, Colomabia and Chile
 all rose more than 1%.
    Stocks followed suit, with those in Brazil in the
lead. Sao Paulo's Bovespa index jumped 2% on broad-based
gains. Mexican shares rose 0.9%, while Chilean shares
 extended gains to a fourth straight session.    
    In Argentina, markets were filled with uncertainty as the
government's deadline for bondholders to agree to its debt
restructuring offer was only hours away.

    The twin economic and debt crises have driven a huge gap
between the Argentine peso's official rate, kept almost
static by capital controls, and tumbling black market and other
unofficial rates.
    Colombia's central bank had earlier this week said it
expects a contraction of between 2% and 7% in gross domestic
product this year due to pandemic-driven impact on productivity.

    Analysts at Credit Suisse expect a contraction of 4.1% 
    "We expect second quarter GDP data to be sharply down due to
the lockdown ... We don't expect a full rebound in the third
quarter that would compensate for the decline in the second
quarter, and there is a great deal of uncertainty regarding what
the next steps following the quarantine will be like." 
    
    Key Latin American stock indexes and currencies at 1401 GMT:
  Stock indexes           Latest   Daily %
                                   change
 MSCI Emerging Markets     910.52     1.52
                                   
 MSCI LatAm               1618.48     3.52
                                   
 Brazil Bovespa          79776.75     2.12
                                   
 Mexico IPC              37125.81     0.91
                                   
 Chile IPSA               4012.70     0.33
                                   
 Argentina MerVal               -        -
                                   
 Colombia COLCAP          1116.75      0.3
                                   
                                          
      Currencies          Latest   Daily %
                                   change
 Brazil real               5.7597     1.36
                                   
 Mexico peso              23.7120     1.35
                                   
 Chile peso                 827.8     0.85
                                   
 Colombia peso            3875.42     0.99
                                   
 Peru sol                  3.4017     0.00
                                   
 Argentina peso           67.2700    -0.12
 (interbank)                       
                                   
 
 (Reporting by Susan Mathew in Bengaluru; Editing by Steve
Orlofsky)
  

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