August 22, 2018 / 9:01 AM / a month ago

EMERGING MARKETS-Rouble retreats as sanctions risk makes investors nervous

LONDON, Aug 22 (Reuters) - The Russian rouble retreated on Wednesday as investors worried about the growing sanctions risk from the United States and Turkey’s lira took another pounding, while emerging equities edged up on cautious optimism ahead of Sino-U.S. trade talks.

U.S. lawmakers have been pushing for more aggressive steps against Moscow in response to Russia’s annexation of Crimea, its involvement in Syria’s civil war and cyber attacks to influence U.S. elections.

The rouble weakened 0.7 percent after the U.S. Treasury Department imposed new sanctions over malicious cyber-related activities and North Korean oil transfers in violation of United Nations restrictions.

Other U.S. sanctions on Russian entities, relating to the nerve agent attack on a former Russian spy in Britain, were due to kick in on Wednesday.

Per Hammarlund, chief emerging markets strategist at SEB, also highlighted Microsoft’s discovery of hackers linked to Russia’s government seeking to launch cyber attacks on U.S. political groups ahead of U.S. midterm elections.

“Now the markets are pricing in harsher sanctions than they were before,” he said, noting that the rouble had fallen even though oil prices were up almost 1 percent, a rare decoupling.

Russia cancelled its regular weekly auction of government bonds citing a rapid increase in financial market volatility. The halt was the first of its kind since April when there was widespread selling of Russian assets in the wake of U.S. sanctions on Rusal.

Yields for Russia’s rouble-denominated OFZ bonds, which are popular with foreign investors, have sky-rocketed this month, with the 10-year yield currently at around 8.6 percent.

Turkey’s lira, which has fallen around 37 percent year-to-date on the back of wide-ranging political and economic concerns, was down another 0.7 percent in choppy trading as a dispute with the United States over detained American pastor Andrew Brunson dragged on.

U.S. President Donald Trump’s national security adviser said Turkey could end the lira-battering crisis instantly by freeing Brunson. Washington has ordered tariffs on Turkish goods in retaliation for Brunson’s detention.

“I wouldn’t be surprised if we see another bout of volatility in the lira,” said Hammarlund. “If Trump’s patience runs out he could announce new sanctions on Turkey, it could be individuals or some of the banks – that would be devastating.”

He noted that Turkey’s central bank was still reluctant to hike interest rates, which had reduced confidence. “They haven’t announced any measures to tighten fiscal policy either and those are concerns that will keep pressure on the lira,” he added.

Emerging stocks remained at one-week highs, with MSCI’s benchmark equities index up 0.26 percent in the slipstream of a new intraday high for the S&P500 overnight.

Outperformers included South Africa, which gained 0.8 percent and Hong Kong, up 0.6 percent.

But Chinese mainland shares retreated 0.6 percent after China’s central bank said it would not resort to strong stimulus to support the slowing economy.

There is still some optimism that Sino-U.S. trade talks taking place in Washington over the next two days will go some way towards resolving the bitter tariffs dispute between the world’s two largest economies, although Trump said he did not expect much progress to be made.

Chinese officials reiterated they would not use the yuan as a weapon to deal with trade frictions, with another round of tit-for-tat tariffs due to take effect on Thursday. The yuan was trading flat after four days of gains.

South Africa’s rand slipped 0.2 percent after headline consumer inflation quickened to 5.1 percent year-on-year in July.

The International Monetary Fund said late on Tuesday that it would begin talks with Angola over providing financial support. Angola asked for assistance from the IMF back in April but this had not originally involved any financing.

For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2018, see tmsnrt.rs/2dZbdP5

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For CENTRAL EUROPE market report, see

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For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1047.18 +2.87 +0.27 -9.61

Czech Rep 1074.66 +5.80 +0.54 -0.32

Poland 2277.20 -3.82 -0.17 -7.48

Hungary 36519.47 -488.19 -1.32 -7.26

Romania 8196.27 -15.57 -0.19 +5.71

Greece 702.76 -2.44 -0.35 -12.41

Russia 1070.01 -2.11 -0.20 -7.31

South Africa 51596.23 +470.39 +0.92 -1.78

Turkey 90185.99 +1451.23 +1.64 -21.80

China 2714.61 -19.22 -0.70 -17.92

India 38285.75 +7.00 +0.02 +12.42

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 25.74 25.73 -0.02 -0.82

Poland 4.29 4.29 -0.10 -2.76

Hungary 323.38 323.31 -0.02 -3.97

Romania 4.64 4.64 +0.00 +0.81

Serbia 117.90 117.93 +0.03 +0.42

Russia 67.64 67.19 -0.66 -14.75

Kazakhstan 362.77 361.17 -0.44 -8.26

Ukraine 27.87 27.68 -0.68 +0.99

South Africa 14.41 14.38 -0.23 -14.26

Kenya 100.55 100.90 +0.35 +2.54

Israel 3.64 3.64 -0.02 -4.43

Turkey 6.09 6.05 -0.70 -37.82

China 6.85 6.84 -0.02 -4.96

India 69.85 69.85 -0.00 -8.62

Brazil 4.05 4.05 -0.06 -18.20

Mexico 18.96 18.95 -0.04 +3.64

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 390 1 .02 7 70.39 1

Reporting by Claire Milhench; Editing by Susan Fenton

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