* MSCI World index snaps 5-day losing streak as Asia bounces
* China markets reverse losses on indications of policy support
* European shares open higher, Wall Street likely to rise
* Tentative gains on emerging currencies, stocks (Updates throughout, changes dateline, byline)
By Sujata Rao
LONDON, June 20 (Reuters) - World stocks steadied near three-week lows on Wednesday and Chinese markets bounced after recent sharp falls as expectations grew that policy stimulus by Beijing could temper some of the impact from an escalating Sino-U.S. trade conflict.
The dollar too eased off 11-month highs against a currency basket, Wall Street looked set for a stronger opening and MSCI’s all-country equity index snapped a five-day run of losses, rising 0.3 percent.
Its rebound was fuelled by a bounce of almost one percent in MSCI’s non-Japan Asian shares off 6-1/2-month lows , following gains in Hong Kong, Seoul and mainland Chinese indexes .
Assets perceived to be safe, such as the yen, Swiss franc and the government bonds of Germany and the United States, took a step back after hefty recent rallies.
“I suspect safe-havens such as Bunds and Treasuries could be put to the test as risk sentiment shows signs of stabilising,” Commerzbank strategist Rainer Guntermann said.
One catalyst appeared to be a paper from China’s central bank which suggested cutting banks’ reserve requirement ratios (RRR), which would boost market liquidity and loosen monetary conditions. Analysts said an RRR cut appeared now to be a matter of time.
The central bank also fixed the yuan’s exchange rate a touch higher against the dollar, after the currency posted its biggest daily loss in 1-1/2 years.
However, worries of a fully fledged trade war between the two biggest world economies remain. Washington is threatening tariffs on $200 billion more of Chinese goods and a White House trade adviser said Beijing was underestimating President Donald Trump’s resolve to impose more tariffs.
An escalation in tit-for-tat tariffs would hit hard world growth, company profits and price stability at a time when several big central banks, notably U.S. Federal Reserve, are in policy tightening mode.
The Asian equity gains encouraged European bourses to open higher, with a pan-European index up 0.6 percent after slumping on Tuesday to two-month lows. However, an index of auto shares, a sector highly vulnerable to U.S. tariffs, stayed in negative territory.
Equity futures for New York’s S&P500 index rose 0.25 percent a day after U.S. stocks fell sharply.
“At the end of the day, all these circumstances, including trade wars, have been in play for a while, and the market reacts sharply from time to time,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.
He cautioned however against pushing the equity rally too far: “The framework is set: there is monetary policy tightening, less liquidity, more geo-political uncertainty and an economic situation which in Europe at least we need to be more cautious about.”
As the bid for safety abated, yields on 10-year U.S. Treasury notes rose above 2.9022 percent after touching 2-1/2-week low around 2.88 percent and German yields also inched higher.
Euro zone yields have been pushed lower almost across the board this week, on back of the trade tensions but also on slowing growth momentum across the bloc and a central bank which has pushed back the timing of its first interest rate rise in this cycle by several months.
All that has also hit the euro which slipped 0.2 percent to the dollar, staying near two-week lows of $1.1528 hit after European Central Bank chief Mario Draghi called on Tuesday for a patient approach to monetary policy.
Draghi had been speaking at a banking forum in Sintra, Portugal, where he is due to appear again on Wednesday alongside Fed chair Jerome Powell, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of Australia Governor Philip Lowe.
Britain’s pound too was struggling near a seven-month low of $1.3151 ahead of a crucial vote in parliament over the country’s European Union withdrawal process.
However as the dollar’s rally stalled, emerging currencies such as Mexican peso Taiwan dollar and the South African rand won some reprieve. ING analysts told clients however that “with the risk to trade firmly in place, we don’t look for a material and long lasting rebound in higher beta and emerging market currencies.”
Commodity and crude prices rose, with Brent futures up 0.6 percent back above $75 a barrel before a meeting this week of the OPEC producers group. OPEC member Iran has said a deal to raise oil output is unlikely.
Copper, a key barometer of world growth, rebounded from three-week lows as did other metals such as nickel and zinc. Chinese soymeal futures, which hit two-year highs on Tuesday on fears of curbs or tariffs on U.S. soybean imports, slipped half a percent
Reporting by Sujata Rao; additional reporting by Dhara Ranasinghe and Marc Jones in London and Andrew Galbraith in Shanghai; Editing by Jon Boyle