GLOBAL MARKETS-Equity futures slide on nerves over retail-trading frenzy

* S&P 500 futures drop more than 1%

* Asian stocks erase early gains, on course for weekly drop

* Chinese short-term rates surge amid tight liquidity

By Tom Westbrook

SINGAPORE, Jan 29 (Reuters) - European and U.S. stock
futures fell on Friday, while Asian equities headed for their
steepest weekly loss in months, as a Wall Street retail-trading
frenzy and a liquidity squeeze in China unnerved investors and
weighed on frothy markets.

S&P 500 futures fell 1.2% and Nasdaq 100 futures
fell 1.4%. FTSE futures, DAX futures and
EuroSTOXX 50 futures all fell by just over 1%. The U.S.
dollar rose to a seven-week high against the yen.

MSCI's broadest index of Asia-Pacific shares outside Japan
fell 0.5% and is on course for a weekly loss of
3.8% - which would be the largest since September. Japan's
Nikkei fell 1.5% and is heading for its first weekly
loss of the year.

"I'm definitely seeing the nerves," said Chris Weston, head
of research at Melbourne broker Pepperstone.

"There's a knock-on effect that happens from targeting hedge
funds, and this could have legs ... people are unsure how this
social media movement plays into greater financial markets."

Wall Street has been gripped by a coordinated assault by
small traders organising over online forums, such as Reddit, to
force hedge-funds to reverse short positions - or bets that
stocks would fall.

They lost some of their firepower overnight when brokers cut
off borrowing facilities and restricted trading in some of the
hottest names, such as GameStop and BlackBerry.

The boss of popular online broker Robinhood said the curbs
were deployed to protect the brokerage and its customers but
that some restrictions will be lifted on Friday.

"Robinhood relented. The mob is back in," said Bank of
Singapore foreign exchange analyst Moh Siong Sim, with stocks
the focus for currency traders as equity moves drive sentiment.

"The price action over the past week has been strange," he
said, (which) speaks of forced position shakeouts rather than
being driven by fundamentals."

The nervousness drove some buying into the U.S. dollar,
although apart from making a fresh high for the year of 104.57
yen, it kept within recent ranges against other major
currencies.

It rose about 0.5% against the risk-sensitive Australian
dollar and 0.6% against the Norwegian krone.

SQUEEZE

Adding to nerves, the shake up in equity markets comes as
COVID-19 vaccine rollouts have run into trouble and as global
economic data starts to look less rosy.

Investors were impressed by a smaller-than-expected rise in
U.S. weekly jobless claims on Thursday. But they still rose by
more than 840,000 and data showed the U.S. economy contracted
last year at its sharpest pace since World War Two.

Vaccine production delays have also snowballed into a spat
between the European Union and drugmakers over how best to
direct limited supplies.

Meanwhile, the People's Bank of China (PBOC) injected 100
billion yuan into the financial system on Friday, following a
week of reducing liquidity, which had sparked concerns the
central bank was in fact tightening monetary policy.

Still, the extra money did little to loosen short-term money
markets, where rates rose for a fifth straight day and benchmark
overnight repo rates surged to their highest in
nearly six years.

"The size was not sufficient to fill the liquidity gap
across the Chinese New Year and it is too early to conclude the
end of liquidity squeeze for now," said Mizuho's chief Asian FX
strategist Ken Cheung, referring to Lunar New Year holidays in
coming weeks.

The yuan slipped 0.2% to 6.4627 per dollar. The Hang
Seng Index and the Shanghai Composite eked small
gains on Friday, however both are on course for weekly losses of
more than 2.5%.

The yield on benchmark 10-year U.S. Treasuries
rose overnight and held at 1.0483% on Friday. Gold sat at
$1,842 an ounce and oil prices were steady, with stalled vaccine
rollouts capping upward momentum.

Brent crude futures were last flat at $55.52 a
barrel and U.S. crude futures slipped 0.3% to $52.18 a
barrel.

(Reporting by Tom Westbrook in Singapore and Alwyn Scott in New
York; Editing by Richard Pullin and Ana Nicolaci da Costa)