* World shares up, but set for weekly drop
* Oil prices rally more than 3%
* German Q1 GDP falls 2.2% Q/Q
* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh (Updates with market reaction to Huawei, sterling move)
By Dhara Ranasinghe
LONDON, May 15 (Reuters) - World stocks edged up on Friday and oil prices rallied more than 2%, lifting sentiment after a week pressured by deteriorating U.S.-China relations.
Oil prices rose to their highest levels in more than a month on signs that demand from China is picking up and data showing China’s industrial output in April expanded for the first time this year.
But news that the Trump administration has moved to block shipments of semiconductors to Huawei Technologies from global chipmakers could ramp up tensions with China tempered the upbeat mood.
U.S. stock market futures turned lower, pointing to a negative open for Wall Street shares, while European markets pared gains .
After a bruising week, a broad measure of European stocks was set to end the week almost 4% lower - the biggest weekly fall since the mid-March rout in global stocks as the coronavirus crisis spread worldwide.
MSCI’s world stock index, a touch firmer on Friday, is down around 2.7% this week and also set for its biggest weekly drop since March.
Analysts said this week’s decline, while a natural correction after a rally since mid-March, also reflected growing concerns about rising U.S.-China tensions.
U.S. President Donald Trump on Thursday signaled a further deterioration in his relationship with China over the novel coronavirus, saying he had no interest in speaking to President Xi Jinping and suggesting he could even cut ties with Beijing.
“There is no doubt that the optics around the trade/diplomacy backdrop have worsened in the last week and this has had a negative influence,” Chris Bailey, European strategist at Raymond James in London, said.
“There has also been a subtle change in the perceptions of market participants, for example the negative interest rate debate getting a very good airing in the United States.”
U.S. Federal Reserve Chair Jerome Powell has brushed off the notion that the Fed could push rates below 0% after futures tied to Fed interest rate policy expectations began pricing a small chance of sub-zero U.S. rates within the next year.
Two-year U.S. Treasury yields are trading at just 0.14% , while short-dated bond yields in Britain have dipped back below 0% this week.
Faced with an exceptional hit from the coronavirus crisis, central bankers are under intense pressure to do more to shore up battered economies.
The German economy contracted by 2.2% in the first quarter, its steepest three-month slump since the 2009 financial crisis as shops and factories were shut in March to contain the spread of the coronavirus, preliminary data showed on Friday.
“While the drop is smaller than during the worst quarter of the financial crisis (Q1 2009), the most serious damage of COVID-19 is yet to come,” Florian Hense, an economist at Berenberg, said.
On the currency markets, the euro was marginally softer at around $1.0798, while the dollar dipped 0.2% to 107.02 yen.
Britain’s currency came under further pressure after the European Union’s Brexit negotiator Michel Barnier said that the third round of talks with Britain on a new partnership was “disappointing”.
Sterling was last down 0.6% at $1.2156 and almost 0.5% lower versus the euros.
The Turkish lira was back below 7 per dollar and on course for its best week since February as it recovers from all-time lows.
Reuters reported that Turkey has reached out to various countries for swap lines as it scrambles to try to shore up financing.
Reporting by Dhara Ranasinghe Editing by Angus MacSwan and Mark Heinrich