SINGAPORE (REUTERS) - Asia's stock markets pulled back and major currencies were held in check on Friday (May 29), as investors await the US response to China tightening control over the city of Hong Kong.

China's parliament on Thursday pressed ahead with national security legislation for the city, raising fears over the future of its democratic freedoms and function as a finance hub.

US President Donald Trump, who has vowed a tough response, said he will hold a news conference on China later on Friday. Trepidation about a further deterioration in Sino-US relations sent stocks lower and put investors on edge.

Japan's Nikkei inbdex dipped 0.3 per cent while South Korea's Kospi declined 0.2 per cent and Australia's S&P/ASX 200 Index fell 1.3 per cent.

Hong Kong shares sank 1.5 per cent on opening but pared losses with the Hang Seng index down 0.4 per cent later in the morning.

Singapore's Straits Times Index was 0.3 per cent lower at 10:51am local time.

Futures for the S&P 500 slipped 0.7 per cent.

"It is seen as a major threat to the rally we've had and the recovery," said Shane Oliver, chief economist at Australian wealth manager AMP Capital.

The possible US response could range from a tearing up of the Phase 1 trade deal and fresh tariffs on China, to milder travel or financial sanctions on Chinese officials, he said.

"If it's at the relatively mild end, then I don't think it would derail the recovery bull market, but if it's at the more extreme end with tariffs and harsh treatment of Hong Kong, then I think it gets more problematic," Oliver said.

Trump offered a muted response to Hong Kong's mass democracy protests last year while prioritising a trade deal with Chinese President Xi Jinping. But ties with Beijing have since soured considerably through the COVID-19 pandemic.

Hong Kong's government warned on Friday that withdrawing its special US status, which has underpinned it as a finance hub, could be a "double-edged sword" and urged the United States to stop interfering in internal affairs.

The Chinese yuan, a barometer of Sino-US tension, weakened slightly to 7.1490 per dollar in onshore trade.

Hong Kong's Hang Seng index was 0.4 per cent lower in early trade and has lost 3 per cent in the two weeks since news of China's security legislation broke.

MAY MARCHES ON

Still, despite the gathering tension and the near-daily release of diabolical economic data, enormous global stimulus seems to have dispelled the old adage to "sell in May".

The S&P 500 is up 4 per cent for the month and is on track for its best May since 2009. The rally in the risk-sensitive Aussie dollar is slowing, but the currency has gained nearly 2 per cent for the month and sits 20 per cent above March lows.

The reason for optimism stems from signs of progress away from the presently parlous state of the world economy.

The number of Americans seeking jobless benefits fell for an eighth straight week last week and New York has outlined plans for reopening.

"As we have said about the reopening and ensuing recovery, this is a process," said RBC Capital Markets' chief US economist, Tom Porcelli. "And right now the process is moving along in the right direction."

Elsewhere the euro remained firm and headed for its best month since December as the European Union's announcement of a 750-billion-euro coronavirus recovery fund fuels optimism about the euro-zone economy and its political future.

The euro was last at US$1.0855, close to a two-month high of US$1.1094 hit overnight.

Gold was firm at US$1,720.75 an ounce.

Demand jitters kept oil under pressure and Brent crude slipped 29 cents or 0.8 per cent to US$35.00 a barrel, while US crude was down 1.2 per cent at US$33.31 a barrel.

The bond market remains priced for maximum caution. Yields on benchmark 10-year US Treasuries fell 3 basis points to 0.6705 per cent on Friday. That is more than 100 basis points below where they began 2020. Yields fall when prices rise.