GLOBAL MARKETS-China cheers MSCI weight gain, yen takes the strain

(Adds Wall Street prospects)

* China blue chips surge

* MSCI says it will quadruple China A-share weighting

* European shares higher, German retail sales strong

* Pound takes a breather after second bumper week running

* U.S. Q4 GDP up 2.9 pct, better than expected

* Graphic: World FX rates in 2019

LONDON, March 1 (Reuters) - World markets enjoyed a lively end to an otherwise slow week on Friday, with Chinese A-shares leaping after MSCI quadrupled their weight in its global benchmarks and strong U.S. economic data lifting the dollar and bond yields.

China figured heavily in a sudden end-of-week flurry of news that lifted Asia then Europe and helped U.S. futures hop higher as they digested some benign inflation.

China’s blue-chip CSI300 index surged 2.2 percent to land its best week since November 2015 after index provider MSCI’s boost that could draw more than $80 billion of fresh foreign inflows to the world’s second-biggest economy.

Chinese PMI manufacturing for February had also surprised to the upside, with the fact that it remains in contraction territory helpfully offset by a sharp increase in the forward-looking new orders index component.

It followed Thursday’s official Chinese PMI data which also showed new orders expanding and a stronger-than-expected U.S GDP figure, while European shares were helped up 0.5 percent by the fastest rise in German retail sales since October 2016.

“We are seeing a fairly decent uptick in European markets,” said CMC Markets analyst David Madden, citing the combination of the data and some encouraging comments from the United States on China trade talks.

There was still some grizzly news for the bears to claw at. Spain’s manufacturing sector contracted for the first time for more than five years, Italy remained fragile, while in eastern Europe Czech manufacturing sentiment fell at its fastest rate in six years.

Madden said the market reaction showed that “bad news can be good news” because it could well encourage the European Central Bank to hand out another dump of cheap loans to euro zone banks in the coming months.

Long-dated government bond yields in Germany, the euro zone’s benchmark issuer, were set for their biggest weekly increase in more than a year, reflecting easing concern about the global growth outlook and hopes that a no-deal Brexit will be avoided.

China remained the day’s main focus though.

The jump in stocks there added to a strong 20 percent rebound this year. Major indexes posted their best month in nearly four years in February, having been helped by expectations for government stimulus and signs of progress in U.S. trade talks.

“Just two months ago China was facing one of the worst years it’s ever had in terms of equity market performance. So I think investors are taking very seriously the fact that the rebalancing of MSCI is happening,” said Jim McCafferty, head of equity research, Asia ex-Japan at Nomura.


Elsewhere in Asia, Japan’s Nikkei 225 ended 1 percent higher, helped by a weaker yen, while Australian shares added 0.4 percent.

It contrasted with a weaker finish on Wall Street on Thursday after U.S. President Donald Trump had fuelled concerns over U.S.-China trade talks, warning that he could walk away from a deal with China if it were not good enough.

But in subsequent comments, White House economic adviser Larry Kudlow called progress in the negotiations “fantastic” and said the countries were “heading towards a remarkable, historic deal.”

Mixed messages on trade combined with the collapse of the summit between Trump and North Korean leader Kim Jong Un on denuclearisation, and data from China showing slowing factory activity to pressure U.S. stocks.

“News that President Trump walked out of the meeting with Supreme Leader Kim, because the two sides couldn’t reach an agreement over North Korea’s nuclear disarmament, dashed hopes for an easing in geopolitical tensions,” analysts at ANZ said.

South Korea’s financial markets had been closed on Friday for a public holiday.


Better-than-expected U.S. economic growth in the fourth quarter had little impact on U.S. stocks. Gross domestic product rose 2.9 percent for the year, just shy of the 3 percent goal set by the Trump administration.

It was continuing to lift yields on benchmark 10-year Treasury notes though. The yield made modest further gains in Europe to creep to 2.7295 as German Bund yields shuffled higher too.

Dallas Federal Reserve Bank President Robert Kaplan had said on Thursday that it will take time to see how much the U.S. economy is slowing, supporting views of the Fed’s rate-hike holiday at least through to June.

The dollar also rose again, adding 0.5 percent against the yen to 111.90 to touch a new high for the year..

The dollar index, which tracks the greenback against six major rivals, was up 0.2 percent at 96.302, though it remained fractionally lower for the week overall.

It is Britain’s pound that has been the star of the week. It has jumped more than 1.5 percent after more twists in the Brexit saga cut the chances of the UK crashing out the EU at the end of the month without a transition deal. It was down a fraction on the day at $1.3232

In commodity markets, U.S. crude bounced between $57.88 and $56.98 a barrel, and Brent crude between $66 and $67 per barrel. Spot gold dipped 0.5 percent on the stronger dollar, to $1,305.35 per ounce.

It left the precious metal on course for its biggest weekly fall in nearly four months.

Additional teporting by Andrew Galbraith in Shanghai, Editing by William Maclean and Andrew Cawthorne and Kirsten Donovan