Updates to U.S. market open

By Lawrence Delevingne and Naomi Rovnick

Aug 16 (Reuters) - U.S. shares edged lower on Friday but were poised for weekly gains, along with stock markets elsewhere, after encouraging economic data this week helped soothe fears of a recession in the world's largest economy.

In early trading, the Dow Jones Industrial Average .DJI fell 0.05%, the S&P 500 .SPX lost 0.09%, and the Nasdaq Composite .IXIC declined 0.3%.

MSCI's main world stock index .MIWO00000PUS rose 0.15%, adding to its week-long recovery from market turmoil last week generated by U.S. recession fears and foreign exchange gyrations. Europe's STOXX share index .STOXX rose 0.1% on Friday and headed for a weekly rise.

The VIX .VIX U.S. stock volatility index, broadly considered the market's fear gauge, sat at benign levels of about 15 after hitting a four-year high of 65 early last week.

The sharp turnaround in market sentiment came after a batch of U.S. data this week showed inflation was moderating but retail spending was robust.

That has helped the market narrative move away from recession concerns, sparked by a weak U.S. jobs report in early August, to confidence the economy can keep growing. Softer inflation data has also reinforced expectations of a Fed rate cut in September.

The so-called soft landing scenario may not hold, Aviva Investors multi-asset portfolio manager Sotirios Nakos cautioned, adding that markets could keep swinging with every new economic data point.

"The market went very quickly to price more negative data and now what we're primarily seeing is the rapid unwinding of that," he said.

"I do not think a lot of money has participated in this bounceback," he added, noting that thin summer trading conditions in August would have exacerbated market moves.

Traders expect the U.S. Federal Reserve to lower borrowing costs from a 23-year high next month but have reduced their bets for an emergency 50-basis-point cut to 25%, down from 55% a week ago, the CME FedWatch tool showed.

Invesco multi-asset fund manager David Aujla said the U.S. was unlikely to go into recession. But markets likely would be more volatile through to the end of this year, he said, particularly around November's U.S. presidential election.

"We prefer to focus on fundamentals in guiding our investment decisions," he added.

GAINS IN ASIA

In Asia, Japan's Nikkei share average climbed 3.6% on Friday and notched its best week in more than four years, while Hong Kong's Hang Seng Index .HIS rose 1.9%.

Japanese stocks gainedfollowing heavy losses last week after a surprise Bank of Japan rate cut sent the yen soaring against the dollar, wrecking yen-funded stock trades.

The Japanese currency fell about 1% versus the dollar JPY=EBS on Friday, some distance away from last week's seven-month peak.

The euro EUR=EBS struggled to break above the level of $1.10 against a firmer dollar, which was buoyed by Thursday's retail sales report.

Government bond trading was lacklustre, meanwhile, as a return to confidence sapped demand for the debt securities viewed as buffers against equity market risk.

The benchmark 10-year yield US10YT=RR, which influences debt pricing worldwide, was 3 basis points (bps) lower at 3.894%. US/

Germany's equivalent bund yield DE10YT=RR also ticked down to 2.239%.

Oil prices fell on Friday and were on track for a weekly decline, with Brent slipping to around $80 a barrel after a string of dismal indicators for July from China overshadowed geopolitical risks.

U.S. crude CLc1 lost 1.29% to $77.15 a barrel and Brent LCOc1 fell to $80.08 per barrel, down 1.18% on the day.

Spot gold XAU= rose 1.7%. GOL/

Reporting by Lawrence Delevingne in Boston and Naomi Rovnick in London. Additional reporting by Rae Wee in Singapore; Editing by Shri Navaratnam, Clarence Fernandez, Ana Nicolaci da Costa and Kim Coghill

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