May 23, 2019 / 8:54 AM / a month ago

EMERGING MARKETS-Emerging market stocks slide, India stands out on election optimism

* U.S.-China trade tensions keep emerging markets under pressure

* Indian stocks rise as PM Modi’s party wins election

* South African rand softer before central bank rate decision

By Aaron Saldanha

May 23 (Reuters) - Emerging market stocks hit a four-and-a-half month low on Thursday, as fears of a worsening U.S.-China trade war cast a shadow over developing world assets.

China’s Commerce Ministry said if the United States wants to continue with trade talks, it needs to “correct its wrong actions,” while the U.S. military said it sent two Navy ships through the Taiwan Strait on Wednesday.

The actions added to geopolitical tensions in a week which has already seen U.S. sanctions slapped on Chinese firm Huawei, with the U.S. administration reportedly mulling over more action on firms in the world’s second largest economy.

“We’ve seen sentiment deteriorate ... the latest Huawei debacle heightens tensions further and we don’t see any respite this year, to be honest,” said Simon Harvey, FX analyst at Monex Europe.

“If it does come, it’ll happen at the back end of the year with some sort of cosmetic changes.”

MSCI’s developing world stocks benchmark slid 0.8%, with stocks in index heavyweight China falling 1.4%.

MSCI’s emerging market currencies index slipped 0.1%, as broadly supportive minutes from the U.S. Federal Reserve’s May 1 meeting failed to meaningfully prop up developing world currencies.

Indian Prime Minister Narendra Modi’s party won the world’s largest election, securing him a second straight term in office and boosting sentiment towards the country’s assets as they outperformed lagging emerging market peers on the day.

The Sensex smashed through the 40,000-point mark for the first time ever before paring most gains.

India’s rupee consolidated gains after firming at the start of the week when exit polls predicted the electoral victory. Yields on 10-year local bonds hit a 1-1/2-month low at about 7.19%, data accessed on Refinitiv Eikon showed.

Turkey’s lira was 0.5% lower, against a backdrop of data showing a slide in manufacturing confidence.

South Africa’s rand was 0.5% weaker ahead of the results of a central bank rate meeting, the first since elections were held earlier this month. A Reuters poll predicts no change in borrowing costs.

“In the past few days we’ve been looking at how the South African government’s going to form up, what kind of cabinet ministers they are going to appoint and how they are going to trim the fat on the size of their cabinet,” said Monex Europe’s Harvey.

“Most central banks when there are elections and periods of restructuring internally, they tend to stay neutral, wait to see what the policies are regarding reforms before they leap into action.”

Russia’s rouble dipped 0.2%, while stocks fell 0.7%, hurt by declining energy stocks on lower prices of oil.

Emerging European currencies were little changed against the euro, with Poland’s zloty dipping 0.1%.

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Reporting by Aaron Saldanha in Bengaluru; Editing by Andrew Cawthorne

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