GLOBAL MARKETS-Top shares stabilise after selloff, emerging markets trail
* Investors return after Thursday's sharp declines
* MSCI World index on track for worst week for 12 months
* European shares up 0.6 pct, Wall Street seen higher
* Dollar steps back from two-week high
By Richard Hubbard
LONDON, June 21 (Reuters) - Leading world shares, bonds and commodities staged a modest recovery on Friday after sharp falls triggered by the U.S. Federal Reserve's stimulus withdrawal plan, with investors still assessing the new landscape.
Emerging markets remained under stress, however, and extended their losses. The signs of U.S. economic strength which underpinned the Fed's policy change was seen sparking a migration by investors back to more advanced economies.
While easing fears about an immediate banking crisis in China helped make for a calmer tone, short-term funding rates there remain elevated, especially for smaller lenders.
Wall Street was set to open slightly higher after a two day selloff, but trading could be jumpy as volatility in the market hit its highest level this year on Thursday, according to a closely-watched gauge of investor anxiety.
"We are in a new environment," Larry Kantor, head of research at Barclays said. "It has been an extremely friendly (investor) environment and now, it is just going to be a bit more normal."
MSCI's broad world stock index, which tracks shares in 45 countries, was up 0.25 percent after dropping 3.5 percent in Thursday's rout, though it remains on course for its worst week in over a year.
In Europe, the broad FTSE Eurofirst 300 index had rallied by 0.7 percent at midday, having slid 3.1 percent on Thursday, for its biggest one-day fall in 19 months. The recovery was led by food and beverages stocks, "defensive" sectors which tend to perform steadily in an uncertain environment.
However, there was little respite across the emerging markets where MSCI's benchmark index added a further 0.5 percent loss to the 4 percent shed in Thursday's violent selloff, its biggest daily fall since September 2011.
As the Fed's policy tapering gradually pushes U.S. Treasury yields higher, the attractiveness of the returns on offer in star developing countries like Turkey and South Africa has waned.
The MSCIEF index has fallen more than 5 percent this week making for a year-to-date loss of around 15 percent, and many in the market see further falls ahead.
Emerging market currencies have been under similar selling pressure with the Korean won < KRW=KFTC> leading the declines to touch a one-year low on Friday and Malaysia's ringgit at its weakest in nearly two years.
"In a nutshell, it's a backwash from the post-Lehman fervour towards emerging markets amidst a zero interest environment," said Emmanuel Ng, a foreign exchange strategist for OCBC Bank.
The dollar, which has been the main beneficiary of this week's turmoil, stepped back from a two-week high against a basket of developed currencies on Friday but was seen staying on a solid footing given the Fed's plans.
It also gained 0.4 percent against the yen to 97.60 yen in choppy trade.
"Players will likely park (assets) in the dollar until we have got a little more clarity about where the world is going," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank.
All major equity markets along with many of the world's key bonds and commodities remain on course for their worst week in months if not years as investors prepare for the end of Fed's massive $85 billion a month of liquidity injections.
Fed Chairman Ben Bernanke heralded the end of the era of easy money on Wednesday when he said that, if the U.S. economy keeps improving as expected, asset purchases would be scaled back later this year and end completely by the mid 2014.
The huge stimulus effort has driven many riskier assets to new highs and even after this week's selloff many will still be in positive territory for the year though the adjustment to the Fed's new policy is expected to be ongoing.
"We think the stock markets still have a little bit further to go. We're a little bit less optimistic than the Fed as we think fiscal tightening is still going to drag on the economy in the next few months," said Barclays' Kantor.
A re-emergence of political turmoil in Greece on Friday complicated the recovery in euro zone assets with the single currency slipping 0.1 percent to $1.3210, and 10-year Greek debt yields up 88 basis points to 11.6 percent.
But core German bonds were little changed, pausing after posting their biggest daily drop since March on Thursday.
Commodities saw some demand from investor's attracted by the week's big price falls although worries about China's sluggish growth outlook weighed on sentiment.
Gold recovered from a three-year trough to be up 1.2 percent at $1,292.60 an ounce. Brent crude recovered to trade up 45 cents at $102.60.
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