* World shares steady but set for second weekly loss
* Italian assets stay under pressure from political risk
* Turkey lira resumes slide, dollar resumes rise (Updates throughout, releads, changes dateline to LONDON)
By Sujata Rao
LONDON, May 25 (Reuters) - World shares steadied and the dollar resumed its rise on Friday after a wobble caused by U.S. President Donald Trump’s decision to cancel a summit with North Korea, though political risk put Italian markets on track for heavy weekly losses.
Markets were soothed somewhat by the Pyongyang’s measured response to Trump’s announcement, with Vice Foreign Minister Kim Kye Gwan expressing hope for a “Trump formula” to resolve the standoff over its nuclear programme
North Korea tensions aside, markets’ appetite for risk was kept in check by concern over Italy’s president opposing the incoming coalition government’s plan to appoint a politically inexperienced eurosceptic as economy minister.
MSCI’s all-country equity index was flat after three days of losses which put it on track for its second straight week in the red, while non-Japanese Asian equities also eked out 0.1 percent gains.
The Seoul index pared falls of almost one percent to trade down 0.2 percent and the Korean won also firmed 0.3 percent to the dollar.
But despite Thursday’s Wall Street declines, there were no immediate signs of a broad sell-off with Wall Street’s volatility index ending at a four-month low.
“Market reaction to heightened political risk remains reasonably muted. If they are not global events affecting large swathes of countries in a major way, the calculation is that the impact will be limited,” Indosuez Wealth Management global head of economic research Marie Owens Thomsen said.
She cited the example of Turkey and Italy where a stock and bond sell-off has not spilled much into other emerging economies or peripheral euro zone states such as Spain or Portugal.
European shares opened firmer but looked set for their first weekly drop since March, pressured by the Italy worries and signs the euro bloc’s economic recovery continues to run out of steam.
Italian stocks, which saw record outflows in the past week, fell 0.3 percent and were set for their third straight week of losses
European carmakers’ shares which fell heavily after Trump mooted possible tariff increases on imported cars, bounced after the comments drew criticism from U.S. business groups and members of his own party.
However, worry about Italy kept the euro under pressure. It fell 0.15 percent against the dollar, putting it on track for the sixth straight week of losses, while the Swiss franc, traditionally seen as a safe-haven, is set for a fourth consecutive weekly gain against the single currency.
Also on the upside, the dollar rebounded 0.25 percent after touching two-week lows versus a basket of currencies on Thursday. However, it held under this week’s five-month highs.
The yen, another currency deemed to be a safe-haven asset, slipped 0.2 percent against the dollar, reversing gains seen after the summit cancellation.
“The euro continues to be under pressure especially against the franc as Italian/German spreads are widening but markets are taking a wait-and-see approach for now,” Societe Generale strategist Alvin Tan said, referring to the premium investors demand to hold Italian bonds compared with safer German Bunds.
The spread on 10-year respective bonds widened on Friday to 200 basis points (bps), having widened 30 bps this week.
German 10-year fell about 2 bps, tracking U.S. Treasuries where yields touched near two-week lows on Thursday.
For Europe, another potential headache are signs its growth recovery is running out of steam. Some relief on this front was provided by Germany’s Ifo business confidence index which held steady this month after falling for five straight months.
However, this week’s PMI business surveys indicated growth was slowing, with expansion at a 20-month low in Germany. UK data meanwhile confirmed first quarter growth at a lacklustre 0.1 percent.
With U.S. capital goods orders data due later in the day, Treasury yields stayed well off this month’s seven-year highs.
“For many Asian markets, rises in U.S. bond yields would have been a bigger problem (than cancellation of the meeting between Trump and Kim),” Daiwa Securities senior strategist Yukino Yamada said.
Worries that investors could shift assets from emerging markets to higher-yielding U.S. bonds have been a major headwind for emerging markets this year.
Among them, Turkey has been the worst hit over concerns about the central bank’s ability to tame double-digit inflation because of political pressure from President Tayyip Erdogan, a self-described “enemy of interest rates”.
The Turkish lira has given up most of the gains made after the central bank’s emergency 300 bps rate rise on Wednesday and stood at flat against the dollar. It has fallen almost 15 percent this month.?
Additional reporting by Swati Pandey in Sydney Editing by Louise Ireland