May 25, 2018 / 11:49 AM / 24 days ago

GLOBAL MARKETS-Shares and dollar in modest recovery but politics curb gains

* Political risk rears head in Spain

* Italian stocks bonds, set for big weekly falls

* Turkey lira resumes slide, dollar resumes rise (Updates throughout)

By Sujata Rao

LONDON, May 25 (Reuters) - World shares steadied and the dollar resumed its rise on Friday after a wobble caused by U.S. President Donald Trump’s decision to cancel a summit with North Korea, though political risk put Italian markets on track for heavy weekly losses.

Equity futures signalled a firmer opening for Wall Street.

Markets were soothed by Pyongyang’s measured response to Trump’s Thursday announcement, with Vice Foreign Minister Kim Kye Gwan expressing hope for a “Trump formula” to resolve the standoff over its nuclear programme.

North Korea tensions aside, the appetite for risk was kept in check by concern over Italy’s president opposing the incoming coalition government’s plan to appoint a politically inexperienced eurosceptic as economy minister.

Political risk also reared its head in Spain, where a threat of no-confidence motions against Prime Minister Mariano Rajoy sent Spanish stocks and bond prices plunging.

However, MSCI’s all-country equity index was flat after three days of losses which put it on track for its second straight week in the red. Asian equities also eked out modest gains.

While yields on German and U.S. bonds fell amid the uncertainty, there have been few signs of a wide-ranging sell-off in higher-risk assets - Wall Street’s volatility index stayed near four-month lows.

“Market reaction to heightened political risk remains reasonably muted. If they are not global events affecting large swathes of countries in a major way, the calculation is that the impact will be limited,” Indosuez Wealth Management global head of economic research Marie Owens Thomsen said.

She cited the example of Turkey and Italy where a stock and bond sell-off has not spilled much into other emerging economies or euro zone states.

European shares rose 0.2 percent , ceding some gains after the Spanish news broke. They are set for their first weekly drop since March, pressured by politics and signs the euro bloc’s economic recovery continues to run out of steam.

Italian stocks, which saw record outflows in the past week, fell 0.6 percent and were set for their third straight week of losses Spanish stocks fell 2 percent after news of the possible no-confidence motions.

European carmakers’ shares which fell heavily after Trump mooted possible tariff increases on imported cars, bounced after the comments drew criticism from U.S. business groups and members of his own party.

However, worry about Italy kept the euro under pressure. It fell 0.2 percent against the dollar, putting it on track for the sixth straight week of losses, while the Swiss franc, traditionally seen as a safe-haven, is set for a fourth consecutive weekly gain against the single currency.

The dollar rebounded 0.25 percent after touching two-week lows versus a basket of currencies on Thursday. However, it held under this week’s five-month highs.

The yen, another currency deemed to be a safe-haven asset, slipped 0.2 percent against the dollar, reversing gains seen after the summit cancellation.

“The euro continues to be under pressure especially against the franc as Italian-German spreads are widening,” Societe Generale strategist Alvin Tan said, referring to the premium investors demand to hold Italian bonds compared with safer German Bunds.

The spread on 10-year respective bonds widened Friday to 200 basis points (bps), having widened 30 bps this week.

German 10-year yields fell almost 5 bps, tracking U.S. Treasuries where yields hovered near two-week lows.

For Europe, another potential headache are signs its growth recovery is running out of steam. Some relief on this front was provided by Germany’s Ifo business confidence index which held steady this month after falling for five straight months.

However, this week’s PMI business surveys indicated growth was slowing, with expansion at a 20-month low in Germany. UK data meanwhile confirmed first quarter growth at a lacklustre 0.1 percent.

With U.S. capital goods orders data due later in the day, Treasury yields stayed well off this month’s seven-year highs.

“For many Asian markets, rises in U.S. bond yields would have been a bigger problem (than cancellation of the meeting between Trump and Kim),” Daiwa Securities senior strategist Yukino Yamada said.

Worries that investors could shift assets from emerging markets to higher-yielding U.S. bonds have been a major headwind for emerging markets this year.

Among them, Turkey has been the worst hit over concerns about the central bank’s ability to tame double-digit inflation because of political pressure from President Tayyip Erdogan, a self-described “enemy of interest rates”.

The Turkish lira has given up most of the gains made after the central bank’s emergency 300 bps rate rise on Wednesday and stood at flat against the dollar. It lost 0.5 percent on Friday and is down almost 15 percent this month.

Additional reporting by Swati Pandey in Sydney Editing by Louise Ireland

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