LONDON, Sept 6 (Reuters) - Emerging stocks flirted with fresh 14-month lows on Thursday amid escalating trade tensions, though many battered currencies took a breather after days of hefty losses with South Africa's rand strengthening nearly 1 percent.
MSCI's emerging market equity benchmark fell 0.4 percent to a three-week low in its seventh straight day in the red, edging to within a whisker of its lowest level since July 2017 and firmly back in bear territory. The index has lost now nearly 21 percent from its January peak.
Steep losses in Asia dragged the benchmark lower, with Hong Kong and China mainland stocks falling around 1 percent on concerns that U.S. President Donald Trump's administration could slap tariffs on an additional $200 billion worth of Chinese products following the end of its consultation period later in the day.
"That, then, could lead to new China tariffs being announced shortly – and China in turn stands ready to retaliate," Bas van Geffen at Rabobank wrote in a note to clients. "This would certainly be bad news for equities globally, as it would elevate the trade conflict to a whole new level. Fears of a U.S. tariffs announcement are adding to the EM selloff."
Meanwhile emerging market currencies were taking a breather following hefty losses in recent days. Emerging market currencies have been battered after a full blown currency crisis engulfed Turkey and the crisis in Argentina sent tremors through developing economies.
South Africa's rand strengthened 0.9 percent against the dollar after President Cyril Ramaphosa repeated promises for a stimulus package to reignite growth following data earlier in the week showing the continent's most industrialised economy unexpectedly dipped into recession in the second quarter - its first since 2009.
Adding to momentum was data showing that South Africa's current account deficit narrowed to 3.3 percent of gross domestic product in the second quarter.
However, ratings agency Moody's warned that the slump into recession exacerbated fiscal and monetary challenges for South Africa, and was a "credit negative". The rand has tumbled 20 percent since the start of the year.
Turkey's lira, which has dropped more than 40 percent since the start of the year, strengthened 0.5 percent. Ankara also said it had appointed two deputies to the Ministry of Treasury and Finance led by President Tayyip Erdogan's son-in-law Berat Albayrak.
Mexico's peso matched those gains, though Russia's rouble was treading water as the economy ministry cut its economic growth forecast and with the threat of possible new sanctions from the U.S. looming large.
However, it seemed there was little let-up of pressure on the horizon for both local and external debt markets.
The premium of emerging market debt over safe-haven U.S. treasuries as measured by the JP Morgan EMBI Global index closed at its highest in more than two years on Wednesday. Meanwhile the VanEck ETF, which replicates JP Morgan's local currency emerging bond index GBI EM, touched a fresh record low in its sixth straight day in the red.
"Seeing EM sovereign-U.S. credit spread differentials at their widest suggests that market tension is on the rise," Morgan Stanley's Hans Redeker wrote in a note to clients.
"For EM spreads to tighten, liquidity conditions need to improve, but we currently see no indication of this."
In central Europe, the Serb dinar firmed a touch ahead of a central bank meeting where policy makers are expected to keep the region's highest benchmark rate unchanged at 3 percent rather than cutting it further.
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