* Asian shares rebound from 2-month lows
* All eyes on U.S.-china trade talks
* Asian stock markets: tmsnrt.rs/2zpUAr4
By Hideyuki Sano
TOKYO, May 10 (Reuters) – Asian shares inched up from two-month lows on Friday, hours ahead of the Trump administration’s plan to raise tariffs on Chinese imports, as investors waited to see if negotiators can salvage a deal and avoid a sharp escalation in the trade war.
U.S. President Donald Trump said on Thursday he had received a “beautiful letter” from Chinese President Xi Jinping, stoking hopes that Washington may suspend its plan to raise tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent at 12:01 a.m. (0401 GMT).
That triggered some short-covering for stocks in early Asian trade though investors remained cautious.
Top U.S. and Chinese trade negotiators concluded the first of two days of talks on Thursday to rescue the deal that is close to collapsing, and the White House said officials would continue discussions on Friday morning.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.1 percent, led by gains in Chinese shares. Shanghai composite rose 3.1 percent
Japan’s Nikkei rose 0.7 percent, while e-mini futures for U.S. S&P500 rose 0.3 percent in early Asian trade.
Yet, some still see a risk of a fresh escalation in the trade war. China has vowed to retaliate if the U.S. hikes tariffs.
“I’d say there’s 50 percent chance the tariffs will be raised as announced, which should lead to fresh selling in stocks later today,” said Norihiro Fujito, chief investment in Mitsubishi UFJ Morgan Stanley Securities.
China’s Vice Premier Liu He said he hopes to engage in a rational and candid exchange with the U.S. after arriving in Washington for a new round of trade talks, China’s official Xinhua news agency reported.
Trump also said on Thursday he was taking steps to authorise new tariffs on $325 billion in Chinese imports.
In addition, rising geopolitical tensions are not helping.
North Korea fired what appeared to be two short-range missiles on Thursday in its second such test in less than a week and the United States said it had seized a North Korean cargo ship.
On Iran, Trump said he could not rule out a military confrontation after Tehran relaxed restrictions on its nuclear programme in response to U.S. sanctions imposed following Trump’s withdrawal of the United States from the accord with a year ago.
The 10-year U.S. Treasuries yield stood at 2.463 percent near its lowest levels since late March.
In the currency market, the yen is favoured, with the dollar changing hands at 109.98 yen, having hit a three-month low of 109.47 on Thursday.
The euro firmed slightly to $1.1230 while the Chinese yuan perked at 6.824 per dollar having hit a four-month low of 6.8638 to the dollar the previous day.
MSCI’s emerging market currency index also tumbled to a four-month low.
Oil prices held firm after Trump’s comments on Xi’s letter raised hopes for a deal for now.
Brent rose 1.1 percent to $71.16 a barrel while U.S. West Texas Intermediate (WTI) crude gained 1.1 percent to $62.39. (Editing by Sam Holmes & Kim Coghill)