May 10, 2019 / 4:28 AM / a year ago

GLOBAL MARKETS-U.S. stock futures slip after tariff increase takes effect

* Asian shares near 2-month lows

* Some investors pin hopes on Friday's U.S.-China trade talks

* U.S. Treasuries and yen supported

* Asian stock markets:

By Hideyuki Sano

TOKYO, May 10 (Reuters) - U.S. stock futures fell and Asian shares pared gains on Friday after U.S. President Donald Trump's tariff increase on $200 billion worth of Chinese goods took effect, ratcheting up tensions between the world's two biggest economies.

E-mini futures for U.S. S&P500 slipped after the higher tariffs kicked in, and were last down 0.5% in volatile trade.

The White House has said the two sides would resume negotiations on Friday morning in Washington after concluding the first of two days of talks on Thursday to try to rescue a trade deal that is close to collapsing.

That has encouraged some investors to cling to hopes that the U.S. administration could revoke the new tariff hike once a deal is reached, though investors are far from convinced.

Trump also said on Thursday he was taking steps to authorise new tariffs on $325 billion in Chinese imports.

"Should tensions escalate significantly in coming days, we expect a pronounced market reaction. There is the potential for a 15%-plus correction in Chinese and emerging market (EM) stocks, and around 5-7% falls in global equities, in our opinion,” said analysts at Lombard Odier Investment Managers in a note.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.3%, led by gains in Chinese shares.

China markets were on midday break when the higher tariffs took effect. The Shanghai composite rose as much as 3.1% early on Friday before paring much of that gain, leaving it up 1.5%.

Japan's Nikkei fell 0.7%.

U.S. shares cut losses late on Thursday after Trump said he had received a "beautiful letter" from Chinese President Xi Jinping, stoking hopes of a deal.

Still, on the week, most markets were down on fears about Sino-U.S. tensions.

The S&P500 futures were down 2.8%, the Shanghai index down 6.0%, the Nikkei 4.3% and ex-Japan Asia MSCI 4.3%.

Rising geopolitical tensions are not helping.

North Korea fired what appeared to be two short-range missiles on Thursday in its second such test in less than a week and the United States said it had seized a North Korean cargo ship.

On Iran, Trump said he could not rule out a military confrontation after Tehran relaxed restrictions on its nuclear programme in response to U.S. sanctions imposed following Trump's withdrawal of the United States from the accord with a year ago.

The 10-year U.S. Treasuries yield stood at 2.449 percent near its lowest levels since late March.

It stood less than three basis points above the three-month bill yields.

In the currency market, the yen is favoured, with the dollar changing hands at 109.83 yen, having hit a three-month low of 109.47 on Thursday.

The euro firmed slightly to $1.1226 while the Chinese yuan perked at 6.837 per dollar having hit a four-month low of 6.8638 to the dollar the previous day.

MSCI's emerging market currency index also tumbled to a four-month low.

Oil prices erased much of gains that were made after Trump's comments on Xi's letter raised hopes for a deal.

Brent rose 0.2% to $70.51 a barrel while U.S. West Texas Intermediate (WTI) crude gained 0.4% to $61.96.

Additional reporting by Andrew Galbraith in Shanghai, Editing by Kim Coghill and Richard Borsuk

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