* Banking shares lead rally in U.S., Europe

* Hong Kong, China shares hit by new protests

* Brent crude futures slip 4%

* World FX rates in 2019: tmsnrt.rs/2egbfVh

By Herbert Lash

NEW YORK, May 27 (Reuters) – The euro and equity markets advanced on Wednesday as enthusiasm for the European Union’s plans for a 750 billion euro ($823 billion) recovery fund offset concerns about unrest in Hong Kong over Beijing’s proposed national security laws.

U.S. Treasury yields retreated from gains on the European Commission’s proposed stimulus plan to bolster economies ravaged by the coronavirus pandemic, which had boosted risk appetite and reduced demand for safe-haven bonds and gold.

The commission’s plan also includes 1.1 trillion euros for the EU’s next long-term budget that would contribute to the recovery fund that is aimed especially at Italy and Spain.

News of the plan underpinned a broad market rally in Europe as bank stocks, which typically track the economic outlook, provided the biggest boost to equities. Euro zone banks climbed 4.8%, with French lenders BNP Paribas SA and Societe Generale SA leading gains.

The banking sector also performed well on Wall Street.

Bank of America and JP Morgan Chase & Co led the U.S. banking sector up 3.31%.

Equities are being driven by large flows of money entering the economy, said David Kelly, chief global strategist at JPMorgan Asset Management.

“You got a huge amount of liquidity with nowhere to go,” Kelly said.

However, the market is assuming a bit more positive news than is actually going to come down the pike this year and well into 2021, he said.

“We will see a start of a recovery, but it shouldn’t be misinterpreted,” Kelly said. “We’re not going to get back to full employment or even an unemployment rate below 10% any time this year and maybe it will take most of next year.”

MSCI’s gauge of stocks across the globe gained 0.63%, while the pan-European STOXX 600 index closed up 0.24%.

On Wall Street, the Dow Jones Industrial Average rose 337.62 points, or 1.35%, to 25,332.73 on rising financials and industrial stocks. The broader S&P 500 gained 25.81 points, or 0.86%, to 3,017.58 and tech-heavy Nasdaq Composite added 27.54 points, or 0.29%, to 9,367.76.

Tech heavyweights Amazon.com, Microsoft Corp and Facebook Inc weighted on the Nasdaq, while healthcare and technology stocks weighed on the S&P 500. Technology and healthcare have outperformed during the coronavirus-led market slump.

U.S. Secretary of State Mike Pompeo said he had certified Hong Kong no longer warrants special treatment under U.S. law as it did under British rule, the latest salvo at China’s plans to impose new security legislation on the territory.

President Donald Trump now must decide to end some, all or none of the U.S. economic privileges that Hong Kong enjoys.

Crude prices slid on the news as the growing U.S.-Sino tensions could weigh on global businesses and oil demand, which already has been hit by the coronavirus pandemic. Concerns about the pace of recovery also drew the attention of investors.

U.S. crude settled down 4.48% to $32.81 per barrel and Brent was at $34.74, down 3.95% on the day.

The euro has struggled since falling in March, when investors rushed for the safety of dollars. But analysts say the recovery fund proposals, if they can win over EU members skeptical of an earlier Franco-German plan, could push the euro higher.

The dollar index rose 0.067%, with the euro up 0.06% to $1.0987. The Japanese yen weakened 0.13% versus the greenback at 107.71 per dollar.

MSCI’s ex-Japan Asia-Pacific index fell overnight 0.4% as Hong Kong and mainland China shares extended declines. Hong Kong’s Hang Seng fell 1.0% and mainland shares were down 0.8 amid fears the protests would worsen antagonism between the United States and China.

Benchmark 10-year notes fell 2.6 basis points to yield 0.6802%.

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