* Euro STOXX 600 up 0.7%, recovering from ECB disappointment
* European shares head towards best week in two months
* Markets see central bank respite to trade war, recession fears
* U.S. payroll data at 1430 GMT may show drop in hiring
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
By Tom Wilson
LONDON, June 7 (Reuters) - European stocks gained ground on Friday as hopes that central banks would loosen policy offset trade friction and the threat of global recession, putting indexes on track for their best week in two months.
The broader Euro STOXX 600 was up 0.7% as France’s main index outperformed, setting European stocks on course for their best weekly gain since early April. Oil stocks led the gains, after slumping earlier in the week.
Wall Street futures signalled a positive opening for U.S. markets as well.
Investors around the globe are focussing on the timing of a rate cut by the U.S. Federal Reserve. Markets have fully priced in a cut at its July 31 meeting and two more by mid-2020. Some see the prospect of three cuts by the end of this year.
But a cut is not guaranteed. And the potential for market disappointment with central banks was highlighted on Thursday, when euro zone stocks fell after the European Central Bank declined to hint it would cut rates soon.
“The fact is that market participants are already betting on the first (Fed) cut in July, which looks a bit early in my view,” said Christophe Barraud, chief economist and strategist at Market Securities, a brokerage in Paris.
The prospect of Fed rate cuts underscores the concern with which central banks are assessing the global economy. Many see trade tensions and a tilt towards protectionism as presenting risks of recession.
U.S. President Donald Trump has threatened to impose a 5% tariffs on all exports from Mexico unless it curbs the flow of Central Americans heading to the United States. The prospect of tariffs has rattled global financial markets as the U.S.-China trade conflict rumbles on.
Trump said on Thursday he would decide after a G20 meeting in Japan later this month whether to carry out his threat to hit Beijing with new tariffs on at least $300 billion worth of Chinese goods.
With that escalation looming, markets are assessing how global central banks will respond. Data that could affect any Fed loosening are in focus, starting with U.S. non-payroll farms data due at 1430 GMT.
Forecasts are for U.S. jobs to rise in May, though doubts have grown after poor numbers on private hiring released earlier in the week.
The Fed’s move is widely seen as influencing how other major central banks will act, even if the ECB and Bank of England have less room to manoeuvre with uncertainty over Brexit still pervasive.
“If the Fed starts its first rate cut soon, it will change the outlook,” said Market Securities’ Barraud. “Global central banks will be more accomodative until trade growth recovers.”
European shares echoed an upbeat day in Asia, where indexes in Japan, Australia and South Korea all gained. Chinese and Hong Kong markets were closed for a public holiday.
MSCI world equity index, which tracks shares in 47 countries, edged up 0.16%.
In currency markets, the dollar was set for its worst week since March before the U.S. employment data. Analysts said that currency traders were bracing for weaker numbers, although they added the data would be unlikely to move the dollar much, barring major surprises.
“The data would have to surprise significantly to the downside, based on the analysts consensus, for the markets to act more significantly,” said Thu Lan Nguyen, FX Strategist at Commerzbank in Frankfurt.
The dollar was trading at 97.058 against a basket of six other currencies, up about 0.3% from Wednesday’s eight-week low.
In China, central bank chief Yi Gang said there was plenty of room for both fiscal and monetary policy easing should the trade war with the United States escalate. The comments sent the dollar 0.4% higher in a thin Asian market.
Brent crude futures were up 1.8% at $62.75 a barrel by 0835 GMT amid signs that OPEC and other producers may extend their supply cuts. They gained 1.7% on Thursday.
For Reuters Live Markets blog on European and UK stock markets, please click on: (Reporting by Tom Wilson, editing by Larry King)