LONDON, July 24 (Reuters) - Promises of more stimulus from Beijing lifted Chinese shares to one-month highs and boosted broader emerging equities on Tuesday while Turkey's lira retreated ahead of a central bank meeting.
Investors were cheered by China's pledge to pursue a more "vigorous" fiscal policy, stepping up its efforts to support growth in view of the increasingly heated Sino-U.S. trade war that could deal a harsh blow to the economy.
U.S. President Donald Trump's threat to impose tariffs on all $500 billion of imported goods from China rattled emerging markets on Monday, but China's practical response improved sentiment.
Chinese mainland shares jumped 1.6 percent and Hong Kong shares rose 1.4 percent, helping MSCI's benchmark emerging equities index gain 0.6 percent.
Tech-heavy South Korea and Taiwan also rose 0.4 percent while Poland led emerging Europe bourses, up 1 percent to trade at the highest level since mid-June.
But the expectations of further loosening in China drove the offshore yuan down 0.4 percent to a 13-month low. The onshore yuan also fell 0.3 percent to its lowest since June 2017 and the yield on 10-year Chinese government bonds climbed over 5 basis points to 3.58 percent.
The central bank's 502 billion yuan liquidity injection into the banking system has also contributed to renminbi weakness.
Other emerging market currencies struggled to make headway with Turkey's lira falling 0.5 percent ahead of the first central bank rate-setting meeting since the election. Turkish stocks also fell 0.5 percent.
Inan Demir, senior emerging economist at Nomura International, said the central bank needed to address the significant deterioration in inflation - which hit a 14-year high in June - with a 300 basis point (bp) hike or more, but a moderate hike of 100-125 bps was more likely.
"The damage to the economy as a result of not hiking today would be far bigger than any damage that a moderate hike can inflict," he warned.
The lira firmed over 1 percent on Monday after finance minister Berat Albayrak was quoted as saying that Turkey would not fight with markets but pursue a "win-win" relationship with them.
Demir said Tuesday's weakness was partly due to the continued depreciation in the Chinese renminbi, which was weighing on emerging currencies in general.
The Hungarian forint tested three-week lows against the euro ahead of a central bank meeting at which the bank is expected to keep rates on hold.
Inflation has picked up in central Europe's fast-growing economies, but the Hungarian central bank remains one of the most dovish in the region, with rates at 0.9 percent.
"Given the loose National Bank of Hungary policy stance, we see HUF as the most vulnerable CEE currency and look for EUR/HUF to re-test the 330 level in summer," ING analysts warned in a note.
Mexico's peso firmed 0.3 percent against the dollar after Trump spoke warmly Mexico's incoming president on Monday, saying he expected to get "something worked out" on NAFTA. 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 RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg
Morgan Stanley Emrg Mkt Indx 1076.21 +6.69 +0.63 -7.10
Czech Rep 1090.70 +2.97 +0.27 +1.16
Poland 2228.62 +24.09 +1.09 -9.45
Hungary 34997.51 -143.52 -0.41 -11.12
Romania 7960.90 +11.51 +0.14 +2.67
Greece 752.06 +0.56 +0.07 -6.27
Russia 1136.40 +6.48 +0.57 -1.56
South Africa 50753.79 +272.47 +0.54 -3.39
Turkey 94874.34 -430.81 -0.45 -17.74
China 2905.94 +46.40 +1.62 -12.13
India 36793.50 +74.90 +0.20 +8.04
Currencies Latest Prev Local Local
close currency currency
% change % change
Czech Rep 25.78 25.82 +0.15 -1.00
Poland 4.32 4.33 +0.07 -3.40
Hungary 326.42 326.21 -0.06 -4.87
Romania 4.64 4.64 +0.15 +0.86
Serbia 117.92 117.90 -0.02 +0.41
Russia 62.90 63.05 +0.22 -8.34
Kazakhstan 344.86 345.46 +0.17 -3.50
Ukraine 26.59 26.46 -0.47 +5.87
South Africa 13.48 13.45 -0.21 -8.32
Kenya 100.45 100.50 +0.05 +2.64
Israel 3.65 3.64 -0.04 -4.62
Turkey 4.76 4.74 -0.49 -20.43
China 6.81 6.79 -0.31 -4.51
India 68.97 68.84 -0.19 -7.45
Brazil 3.78 3.78 +0.01 -12.42
Mexico 18.85 18.88 +0.17 +4.24
Debt Index Strip Spd Chg %Rtn Index
Sov'gn Debt EMBIG 358 2 .02 7 78.26 1
Reporting by Claire Milhench; additional reporting by Emma Rumney; Editing by Angus MacSwan