LONDON/TOKYO (Reuters) – Unrest in Hong Kong over Beijing’s proposed national security laws weighed on global shares and oil prices on Wednesday, offsetting optimism about the re-opening of the world economy.

Riot police fired pepper pellets on protesters in Hong Kong’s main business district, rekindling concern about the protests seen last year that hit the territory’s economy.

MSCI’s ex-Japan Asia-Pacific index .MIAPJ0000PUS fell 0.4%, as Hong Kong and mainland China shares extended declines.

Hong Kong’s Hang Seng .HSI fell 1.0% and mainland shares .CSI300 were down 0.8%, amid fears the protests would worsen tensions between the United States and China.

MSCI’s index of the world’s 49 stock markets .MIWD00000PUS was flat but still close to two-and-a-half-month highs reached on hopes of economic recovery in the developed world as countries ease social restrictions.

Oil prices fell amid U.S.-China tensions and concern over how quickly fuel demand will recover as lockdowns ease. Brent crude LCOc1 futures dropped 1.5%, to $35.62. U.S. West Texas Intermediate crude futures CLc1 were down 1.6%, at $33.79 a barrel. [O/R]

Still, European shares remained buoyed by hopes for a post- COVID-19 recovery. The STOXX 600 added 0.4% to reach its highest level since March 10. Britain’s FTSE .FTSE gained 1% and the domestically focused FTSE 250 .FTMC hit an 11-week high as thousands of retailers prepared to re-open on June 1 from a months-long shutdown.

The European Commission is set to introduce a plan to help the European Union economy recover from its coronavirus slump with a mix of grants, loans and guarantees exceeding 1 trillion euros.

“You have two elements going in the right direction. You have the end of lockdown going quite well and PMI (purchasing managers’ index) data showing the ability of economies to recover in the second half of the year is still there,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

“A lot of good news has been integrated in markets already, but I wouldn’t chase them higher as there’s still some complacency and there will be a consolidation.”

E-Mini futures for the S&P 500 ESc1 rose 0.5% to near their two-and-a-half-month high touched the previous day. The index had cleared 3,000 points in Wall Street overnight before pulling back, as some traders returned to the New York Stock Exchange floor for the first time in two months.

But China remained in focus after U.S. President Donald Trump said on Tuesday that he was preparing to take action against China this week over its effort to impose national security laws on Hong Kong.

Worsening relations between the world’s two biggest economies could further hobble global business activity, which is already under pressure from the coronavirus pandemic.

The dollar, measured against a basket of currencies, rose 0.1% to 99.146 =USD.

The Chinese yuan weakened to the lowest levels since early September in both onshore and offshore trade. The onshore renminbi slipped 0.3 to as low as 7.1595 per dollar CNY=CFXS; the offshore currency fell 0.4% to 7.1760 per dollar CNH=.

The euro dropped 0.2% to $1.0961 EUR=EBS, as investors waited for the European Commission to release details of its financial rescue fund.

The German 10-year government bond yield fell after reaching a one-month high on Tuesday. It was last down 2 basis points at -0.442% DE10YT=RR.

Italy’s 10-year government bond yield barely changed, last at 1.552% IT10YT=RR.

U.S. Treasury yields rose, with ten-year yields US10YT=RR at 0.687%, up about 4 basis points from Tuesday.

Gold prices XAU= dropped to a two-week low, before paring some losses to trade down 0.1% to $1,79.00 per ounce. [GOL/]

Editing by Larry King

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