GLOBAL MARKETS-Asian stocks turn red as Hong Kong tensions sour mood

* Asian stock markets: https://tmsnrt.rs/2zpUAr4
* Hong Kong leads regional shares lower
* Japan, Australia shares, European futures defy gloom
* Traders worry about Sino-U.S. tension

By Stanley White and Koh Gui Qing
TOKYO/NEW YORK, May 28 (Reuters) - Asian shares erased gains
and the yuan languished on Thursday on growing worries China's
planned security law for Hong Kong would spark a broader
diplomatic confrontation with the United States.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS fell 0.35%, having been in positive territory
earlier in the day. Shares in Hong Kong .HSI skidded 1.75%.
Stocks in China .CSI300 fell 0.55%.
U.S. stock futures ESc1 pared earlier gains to trade 0.17%
higher.
Not all markets fell with investors in some countries
keeping their focus on prospects of a post-coronavirus economic
recovery.
Japan and Australia were both higher while European stock
futures also defied the gloom with the pan-region Euro Stoxx 50
futures STXEc1 up 1.22%, German DAX futures FDXc1 rising
1.3% and FTSE futures FFIc1 climbing 1.34%. .AX .T
All the same, the outlook remains fraught. The biggest risk
to equities is the Sino-U.S. relationship, which is likely to
worsen after U.S. Secretary of State Mike Pompeo said Hong Kong
no longer warranted special treatment under U.S. law.
"All eyes remain on the U.S.-China relationship," said Chris
Weston, the head of research at Pepperstone, a currency broker.
"This is a risk for markets...one questions if the equity
markets are too complacent here."
The proposal for new legislation is expected to be passed on
Thursday by the National People's Congress. Hong Kong shares erased early gains and fell as worries
about U.S retaliation took hold.
Pompeo said overnight that China had undermined Hong Kong's
autonomy so fundamentally that the territory no longer warranted
special treatment, a potentially big blow to the city's status
as a financial hub. A punitive U.S. response to China on the issue of Hong Kong
could result in a tit-for-tat reaction from Beijing, further
straining ties between the world's two biggest economies and
further hobbling global growth.
Sources have said the U.S. government may suspend Hong
Kong's preferential tariff rates for exports to the United
States, a far less severe response than formally revoking Hong
Kong's special status under U.S. law. President Donald Trump said he will announce a response to
China's policies towards Hong Kong later this week.
Some share markets chose instead to focus on signs of
recovery from the coronavirus pandemic.
Australian shares .AXJO rose to the highest in more than
two months after the country's central bank governor bolstered
hopes for a quick economic rebound. Japan's Nikkei stock index .N225 rose to the highest since
late February as investors cheered the re-opening of economic
activity after a fall in coronavirus infections.
The S&P 500 .SPX closed above 3,000 for the first time in
almost 12 weeks on Wednesday, bolstered by bank stocks, as
investors hoped that the world economy can recover as it
re-opens. .N
Yields on 10-year U.S. Treasuries US10YT=RR rose slightly
to 0.6966%. Although 10-year yields are up from an all-time low
of 0.4980% struck in March, they are still a whopping 120 basis
points below highs seen in January.
U.S. crude futures CLc1 fell 3.2% to $31.76 a barrel,
while Brent crude LCOc1 fell 1.73% to $34.14 per barrel as
investors fretted about Trump's response to China.
The offshore yuan CNH=D3 was mired near a record low of
7.1966 per dollar due to uncertainty over Hong Kong's future. In
onshore trade, the yuan CNY=CFXS was near its weakest since
September last year, which was during the height of the
U.S.-China trade war.
The euro EUR=EBS made a fresh eight-week high of $1.1035,
bolstered by a 750 billion euro plan to prop up the European
Union's virus-hit economies. But it retreated as doubts about
delivering the scheme crept in and last sat at $1.1015.
Spot gold XAU= rose 0.44% to $1,716.41 per ounce as some
investors opted for the safety of the precious metal. GOL/