August 24, 2018 / 8:48 AM / 3 months ago

EMERGING MARKETS-Emerging stocks retreat as trade war grinds on

LONDON, Aug 24 (Reuters) - Emerging stocks fell on Friday after trade talks between the United States and China ended without a breakthrough and another round of tariffs kicked in, but a weaker dollar helped the rouble and the rand to rise.

MSCI's benchmark emerging stocks index fell 0.3 percent with investors looking to a speech by Federal Reserve chairman Jerome Powell at Jackson Hole that may give further clues as to the outlook for U.S. monetary policy.

The index looked set to end the week up over 2 percent, its first winning week since the end of July. The average yield spread of emerging market sovereign bonds over U.S. Treasuries was down 8 basis points (bps) from the start of the week to 360 bps.

Minutes from the Fed's last meeting suggest the bank will raise interest rates again in September, though policymakers acknowledged a prolonged trade dispute could impact the economy.

The U.S. and China activated more tit-for-tat tariffs on $16 billion of each other's goods as two days of talks ended on Thursday.

"Even though China said the discussions had been constructive, they also said they didn't see scope for further negotiations ahead of the mid-term (U.S.) elections – that supports our base case we will see a further escalation," said Jakob Christensen, head of EM research at Danske Bank, adding that Asian economies were particularly vulnerable.

Chinese mainland shares edged up 0.16 percent, alongside South Korea which gained 0.46 percent, but the rest of Asia was in the red and emerging European bourses opened lower.

China's yuan was flirting with a record 11th losing week after an unexpected injection of medium-term funds by China's central bank added to downward pressure on the currency.

But the rand rebounded around 0.5 percent after selling off hard in the previous session on the back of a tweet from U.S. President Donald Trump on South African land reform. Pretoria said Trump's comment had only served to polarise the debate.

The rouble firmed 0.6 percent after the Russian central bank halted dollar buying until September to provide some support for the currency. The rouble is still set to end the week down over 1 percent as investors eyed the risk of further U.S. sanctions.

Russia's economy ministry cut its 2018 rouble forecast after acknowledging the impact of existing sanctions. Russian shares fell 0.4 percent, with Russia's most liquid stock, Sberbank, set to end the week down over 7 percent at a one-year low.

The Turkish lira fell around 0.2 percent and was on course to end the week down some 1.4 percent as a stand-off between Turkey and the U.S. over the detention of an American pastor dragged on.

Brazil's real was on track to end the week down over 5 percent after weakening to its lowest since January 2016 as investors turned increasingly pessimistic over a presidential election scheduled for October.

Jailed former president Luiz Inacio Lula da Silva has consistently led voter intention polls.

Brazilian five-year credit default swaps rose to 280 bps, according to IHS Markit data, the highest since June 19 and up 41 bps from Monday's open.

"The real issue is the need for fiscal consolidation after the election and if it seems Lula will enter office it will be a gamechanger for Brazil and emerging markets," said Christensen. 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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Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1045.40 -2.80 -0.27 -9.76

Czech Rep 1080.03 +0.12 +0.01 +0.17

Poland 2315.56 -7.30 -0.31 -5.92

Hungary 36124.80 -61.51 -0.17 -8.26

Romania 8216.05 +8.82 +0.11 +5.96

Greece 727.87 -3.32 -0.45 -9.28

Russia 1041.51 -2.48 -0.24 -9.78

South Africa 52192.69 +60.93 +0.12 -0.65

Turkey 90185.99 +1451.23 +1.64 -21.80

China 2729.43 +4.80 +0.18 -17.47

India 38281.59 -55.17 -0.14 +12.41

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 25.71 25.73 +0.07 -0.73

Poland 4.28 4.29 +0.24 -2.39

Hungary 324.05 324.28 +0.07 -4.17

Romania 4.64 4.63 -0.08 +0.90

Serbia 117.96 117.97 +0.01 +0.37

Russia 67.81 68.22 +0.61 -14.97

Kazakhstan 360.57 360.47 -0.03 -7.70

Ukraine 27.83 27.83 +0.00 +1.13

South Africa 14.32 14.39 +0.45 -13.73

Kenya 100.65 100.55 -0.10 +2.43

Israel 3.64 3.65 +0.28 -4.35

Turkey 6.10 6.09 -0.15 -37.85

China 6.88 6.87 -0.05 -5.41

India 70.16 70.10 -0.09 -9.02

Brazil 4.11 4.11 -0.00 -19.50

Mexico 18.97 19.00 +0.18 +3.57

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 386 -1 .00 7 72.83 1

Reporting by Claire Milhench; editing by John Stonestreet

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