July 4, 2018 / 9:28 AM / 3 months ago

EMERGING MARKETS-Trade tensions keep emerging equity markets jittery, yuan strong

LONDON, July 4 (Reuters) - Trade war anxiety ruffled emerging equity markets on Wednesday but currencies found some support from a weaker dollar, with China’s yuan strengthening for a second straight day after a central bank move to calm investors.

MSCI’s emerging equity index slipped 0.3 percent with Asian shares nursing some of the biggest falls. Major indexes in mainland China dropped around 1 percent.

Worried about the impact of a full scale trade war between the United States and China, investors have been nervous ahead of Friday’s deadline for Washington to levy tariffs on imports from China. Beijing has vowed to match any moves with tariffs on U.S. products.

However, China’s yuan - which had its worst month on record in June - strengthened sharply against the dollar in a second day of gains after the central bank pledged on Tuesday that it would keep the currency stable.

“The (central bank) may have been wary of a repeat of an August 2015 situation when the market just collapsed after the PBOC allowed a depreciation of about 2.5 percent in a single day,” said Cristian Maggio, head of EM strategy at TD Securities.

“So the move today is a subtle signal that that’s not what’s going to happen, and the market seems to have taken this signal - at least on the currency side - as a positive, risk-on move.”

Meanwhile Turkey’s lira weakened nearly 1 percent to its lowest in more than a week with markets still digesting Tuesday’s data that showed June inflation was nearly double analysts’ forecasts, ramping up pressure on the central bank to raise interest rates.

Markets are concerned about the central bank’s ability to rein in inflation with President Tayyip Erdogan - a self-described “enemy” of higher interest rates - calling for lower rates and saying in May that he would exert more pressure on the central bank after June 24 elections.

“The inflation print yesterday was atrocious...and the worst part of the story is that this isn’t the end of the up move part of the inflation cycle in Turkey,” said Maggio.

“Bad inflation translates into a negative lira reaction, which translates into faster inflation, and that becomes a self-reinforcing loop.”

Currencies elsewhere failed to make much headway despite the dollar treading water with South Africa’s rand and Russia’s rouble weakening 0.2 percent.

In central and eastern Europe, currencies traded steady to slightly stronger against the euro.

In Romania, the central bank holds its rate-setting meeting, with a majority of economists polled by Reuters expecting the bank to hike the key interest rate further by 25 basis points to 2.75 percent.

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

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see

Reporting by Karin Strohecker, additional reporting and graphic by Claire Milhench; Editing by Elaine Hardcastle

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