July 3, 2018 / 9:12 AM / 5 months ago

EMERGING MARKETS-Lira down 1 pct as inflation jumps, trade tensions pressure yuan

LONDON, July 3 (Reuters) - Turkey's lira fell more than 1 percent on Tuesday after inflation leapt by more than expected, while trade tensions between the United States and China continued to take their toll on the yuan and investor appetite for emerging stocks.

The lira slipped as much as 1.4 percent against the dollar to one-week lows after consumer price inflation spiked 2.61 percent month-on-month in June, for an annual 15.39 percent rise year-on-year. This is the highest since 2004 when a new method of calculating inflation was introduced.

Producer prices also rose 3.03 percent month-on-month for an annual rise of 23.71 percent. The leap in inflation comes despite emergency rate hikes by the Turkish central bank in recent weeks, tightening policy by 500 basis points.

Henrik Gullberg, an emerging markets strategist at Nomura, said the focus was now on whether the central bank would raise rates again at its next meeting on July 24.

"The central bank needs to break this vicious circle where currency weakness is feeding into higher inflation, but then an inadequate central bank response is then feeding more currency weakness. They need to hike rates aggressively," he warned.

Investors also eyed a looming July 6 deadline, when the United States intends to impose tariffs on $34 billion worth of goods from China, likely triggering Chinese retaliation.

The heated trade dispute shows no sign of abating, with U.S. President Donald Trump also taking aim at the World Trade Organization, rattling investors who fear tit-for-tat tariffs will crimp global economic growth.

The latest data showed China's exports to the U.S. in June rose 3.8 percent in yuan terms versus a year ago, but this was 23.8 percentage points lower than the growth rate a year earlier.

MSCI's benchmark emerging markets index fell 0.3 percent with Asian markets leading the losses, while the yuan fell 0.2 percent in early trading. This took it past the psychologically important 6.7 per dollar mark for the first time since Aug. 9, 2017.

The Chinese currency has been in a downward spiral in recent weeks as the dispute over trade and Chinese investment into U.S. companies has ratcheted up.

"Given the scale of the move we have seen since June, it is by far the biggest since (the devaluation of) 2015," said Bank of New York Mellon strategist Neil Mellor.

"It speaks of a remedial measure that obviously gets markets moving and prudence suggest that it has to be matched across South East Asia because of the competitive implications."

The People's Bank of China sought to calm market jitters , blaming the yuan's weakness on U.S. dollar strength and external uncertainties, as state-owned banks were seen trying to prop up the currency. This helped put a floor under the yuan, and it recovered to trade flat.

In the latest development in the ongoing row, the United States moved on Monday to block China Mobile from offering services to the U.S. telecoms market, citing national security grounds. The company's Hong Kong-listed shares fell over 2 percent to their lowest in over four years.

The Hong Kong bourse was also down 1.4 percent to its lowest level since October, but Chinese mainland shares struggled into positive territory, reversing an early sell off that saw blue chips hit May 2017 lows.

Other big fallers including Indonesia, down 1.8 percent and Taiwan, down 0.6 percent, but emerging Europe opened firmer, with Hungary stocks up 1 percent and Poland 0.9 percent.

Elsewhere, the Mexican peso bounced 1.1 percent after weakening in the previous session in the wake of a landslide election win by Andres Manuel Lopez Obrador.

He had a call with Trump to discuss immigration, trade and security issues on Monday, with Trump saying the relationship would be "good".

One of the Mexican leader's advisers also said an agreement on NAFTA was possible before December.

Hungary's forint also firmed 0.8 percent against the euro, outperforming its regional peers, ahead of a central bank non-rate setting meeting.

The forint's weakness in recent weeks and a rise in bond yields and short-term market interest rates have generated some expectations in markets that the bank can be pushed into an early monetary tightening.

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 1057.04 -2.28 -0.22 -8.75

Czech Rep 1075.12 +4.62 +0.43 -0.28

Poland 2137.33 +18.02 +0.85 -13.16

Hungary 36192.45 +324.70 +0.91 -8.09

Romania 8051.68 +31.51 +0.39 +3.84

Greece 750.42 +2.21 +0.30 -6.47

Russia 1149.19 -2.47 -0.21 -0.45

South Africa 50690.83 -289.04 -0.57 -3.51

Turkey 97034.03 +260.54 +0.27 -15.87

China 2786.35 +10.79 +0.39 -15.75

India 35383.94 +119.53 +0.34 +3.90

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 26.13 26.08 -0.18 -2.29

Poland 4.40 4.40 +0.06 -5.03

Hungary 327.40 329.90 +0.76 -5.15

Romania 4.65 4.66 +0.15 +0.50

Serbia 117.89 117.88 -0.01 +0.43

Russia 63.20 63.40 +0.31 -8.77

Kazakhstan 342.86 341.56 -0.38 -2.93

Ukraine 26.29 26.22 -0.27 +7.06

South Africa 13.70 13.82 +0.85 -9.82

Kenya 100.75 100.80 +0.05 +2.33

Israel 3.66 3.66 -0.01 -5.01

Turkey 4.66 4.61 -0.97 -18.64

China 6.65 6.66 +0.18 -2.18

India 68.63 68.71 +0.12 -6.99

Brazil 3.91 3.91 -0.06 -15.38

Mexico 19.74 19.95 +1.05 -0.47

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 388 0 .04 7 65.10 1

Reporting by Claire Milhench; additional reporting by Marc Jones, graphic by Karin Strohecker

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