July 8, 2019 / 9:17 AM / 2 months ago

EMERGING MARKETS-Turkish assets stumble on c.bank head's sacking, broader markets glum

* Lira set for biggest fall since early April

* EM stocks slump amid broader risk-off move

* Chinese FX reserves rise more than expected in June

By Sruthi Shankar

July 8 (Reuters) - The mood in emerging markets soured on Monday as fading prospects of a big U.S. interest rate cut from the Federal Reserve supported the dollar, while Turkey’s financial markets were battered by an unexpected ouster of its central bank chief.

The lira fell as much as 2.9% after Turkish President Tayyip Erdogan dismissed central bank governor Murat Cetinkaya, replacing him with deputy governor Murat Uysal, seen as more dovish.

Although no official reason was given for the sacking, government sources and a local newspaper cited Erdogan’s frustration that his repeated calls for interest rate cuts had not been taken into account.

Traders now expecting a central bank monetary policy meeting on July 25 to produce a bold rate cut.

The lira was down 1.7%, on course to post its biggest percentage fall since early April.

“I would’ve expected a larger fall in the currency today. Maybe the market’s waiting for clearer signs about what the implications are,” said William Jackson, chief emerging markets economist at Capital Economics.

“We had expected a 100 basis point cut, but the clear risk now is of much larger and more aggressive rate cut in the near-term.”

The lira had already been under pressure from the prospect of U.S. sanctions for Turkey’s purchase of Russian missile defence systems, and traders are now fretting over the implications of Cetinkaya’s dismissal for central bank independence.

The main share index fell 1.5%, with banks down 2.3%. Yields of Turkey’s dollar-denominated bonds rose across the curve.

The broader risk-off sentiment hit other currencies, with the South African rand dropping 0.2% and the Russian rouble edging lower as strong U.S. jobs data on Friday eased expectations that the Fed would cut rates by 50 basis points in its July meeting, buoying the dollar.

The MSCI’s index of developing world stocks, down over a percent, was on track to post its biggest percentage loss since May 23, with Chinese stocks leading the way lower.

The offshore yuan held steady. Data from the People’s Bank of China showed that China’s foreign exchange reserves - the world’s largest - rose $18.23 billion in June to $3.119 trillion, more than expected.

Growing hopes for a trade war truce with the United States helped to ease downward pressure on the yuan.

Stocks elsewhere were weaker, with South Korea’s Kospi slumping over 2% amid a trade tussle with Japan, which has imposed restrictions on exports of materials for making chips and smartphone displays to South Korea.

Higher gold prices helped South Africa’s equities benchmark cling onto gains.

For GRAPHIC on emerging market FX performance 2019, see tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance 2019, see tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see (Reporting by Sruthi Shankar in Bengaluru; Editing by Kevin Liffey)

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