SCENARIOS-Hot topics for markets at G8 finance meeting

LONDON, June 10 (Reuters) - Finance ministers of the G8 group of industrial nations will meet on Friday and Saturday at a time when financial markets are speculating that the worst of the global slowdown may be over.

While abating pessimism about the economic outlook has taken pressure off G8 countries to come up with a coordinated policy response, there are still headwinds, such as those from Latvia's which are complicating the outlook.

For more on the G8 meeting, please click on [ID:nL5701713]

Following are the main issues on which financial markets are focusing and potential market reactions to what the G8 may say:

ECONOMIC OUTLOOK

Talk of economic green shoots have helped drive benchmark U.S. and euro zone government bond yields to near seven-month highs and bolstered equity markets. Any upbeat comments from G8 finance chiefs will leave the bond yield trend intact. As long as optimism over the economic outlook offsets concerns about higher yields, riskier assets such as stocks will also advance.

A less gloomy view of the economy will likely underpin the rally in commodity prices, which has pushed the Reuters-Jefferies CRB index .CRB to seven-month highs.

EXIT STRATEGIES FROM QUANTITATIVE EASING

Markets want to see if there is any political pressure on central banks to exit or stay in QE mode, especially after German Chancellor Angela Merkel's criticism of central banks' non-standard monetary policy measures. [ID:nL2536682]

Policymakers may discuss exit strategies from the unusual policy steps taken to combat the global economic crisis, but they are unlikely to touch on rising bond yields, a senior official at Japan's Ministry of Finance has said.

Moreover, given the myriad factors driving up yields (including the mountain of government debt being issued), any G8 rhetoric is expected to have a limited ability to reverse the rising yield trend.

DOLLAR WEAKNESS

Many in the market are focusing on whether policymakers will issue comments on the recent broad slide in the U.S. dollar which hit six-month lows against a basket of currencies .DXY in early June. A French finance ministry source said on Wednesday the meeting would not discuss exchange rates, but traders will be keen to see if officials make any comments on the sidelines that suggest discomfort with the recent slide. This could help the dollar, at least in the short term.

IMF SDRS ALLOCATION/NEW FUNDING RESOURCES

The IMF has said it expects to move quickly to agree on a G20 plan to issue $250 billion in new Special Drawing Rights (SDRs) to member countries to boost liquidity in the wake of a global economic downturn and financial crisis. [ID:nN04218310]

The IMF is also considering a plan to issue IMF bonds to member countries to raise funds for the global institution, whose loans are in demand by countries hit by the global financial crisis.

Any sign countries might be wavering in their support for these plans could undermine emerging assets and see crisis-hit emerging economies such as Latvia come under more pressure.

The spill-over to euro zone countries with large exposure to these emerging economies risks weighing on their bonds, and would see them underperform benchmark German Bunds.

GLOBAL STANDARDS/TOUGHER BANK STRESS TEST

Officials are also expected to follow up on topics including World Bank and IMF reform and financial sector regulation.

Although unlikely to result in any major market reaction, investors will want to see if there are any developments in new regulations that might affect financial activity.

Equity investors are likely to keep an eye on whether the United States will press for tougher stress tests for European banks following the recent rally in bank stocks, and what form any European tests might take.

U.S. Treasury Secretary Timothy Geithner has said he would discuss the U.S. experience with stress-testing the capital levels of banks, but did not plan to judge other countries' standards for examining their banks. [ID:nN09398280]

(Editing by Patrick Graham)