LONDON, Sept 18 (Reuters) - Emerging equities rose on Tuesday as investors bet that China would need to step up infrastructure spending to offset the latest tariffs from the United States, while Turkey's lira dipped back towards pre-rate hike levels.
U.S. President Donald Trump has escalated his trade war with China, imposing 10 percent tariffs on about $200 billion worth of Chinese imports, with the rate set to increase to 25 percent by the end of 2018.
China said it would retaliate, but MSCI's benchmark emerging stocks index rose 0.2 percent as some investors believe Beijing will have to boost spending on roads and bridges to help ride out the storm.
"There are hopes they will weather the trade shocks with more easing - that is creating a bit of a positive response in the market," said Jakob Christensen, head of emerging markets research at Danske Bank.
Chinese mainland stocks bounced 2 percent to one-week highs with infrastructure stocks jumping over 3 percent. Hong Kong shares rose 0.6 percent but the yuan weakened 0.2 percent against the dollar.
Emerging Europe opened higher, with Polish stocks up 1.2 percent, while Moscow shares gained 0.4 percent.
Turkey's lira remained the main currency underperformer, down 0.4 percent, erasing most of the gains made after last Thursday's hefty 625 basis point interest rate rise.
In a follow-up measure on Tuesday, the central bank raised the rate paid on lira reserves held at the bank to 13 percent from 7 percent.
"They are effectively asking banks to put more liquidity aside and reduce the funds they have available for lending so it's doing the same thing as monetary policy tightening," said Christensen.
Banking sector stocks rose 1.3 percent, rebounding from Monday's 2.4 percent fall, with the Turkish market as a whole up 0.8 percent.
Turkish bank shares sold off hard in the previous session after President Tayyip Erdogan was quoted as calling for an investigation into members of the opposition who serve on the board of Isbank, the country's biggest lender.
"Erdogan is targeting something that's very robust (with Isbank) and there's only so much he can do. There's only so far he can go politically to undermine economic constructs," said Dominic Armstrong, chief executive and co-founder of the Horatius Fund.
Russia's rouble firmed 0.5 percent, supported by a deal with Turkey on a new demilitarised buffer zone in Syria's Idlib region.
Hungary's forint was steady against the euro ahead of a central bank meeting at which rates are expected to stay on hold at record lows. Investors are looking for more details of future monetary tightening, with inflation picking up.
Overnight, Argentina's battered peso currency inched higher after the government unveiled its budget plan and the IMF said "important progress" had been made on revamping the country's standby loan agreement. 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 1018.29 +1.86 +0.18 -12.10
Czech Rep 0.00 +0.00 +0.00 -100.00
Poland 2236.26 +25.27 +1.14 -9.14
Hungary 0.00 +0.00 +0.00 -100.00
Romania 8193.38 +22.47 +0.27 +5.67
Greece 681.45 -1.30 -0.19 -15.07
Russia 1109.75 +10.25 +0.93 -3.87
South Africa 49827.04 -369.88 -0.74 -5.15
Turkey 95129.09 +781.43 +0.83 -17.52
China 2699.95 +48.16 +1.82 -18.36
India 37522.84 -62.67 -0.17 +10.18
Currencies Latest Prev Local Local
close currency currency
% change % change
Czech Rep 25.45 25.44 -0.04 +0.30
Poland 4.30 4.30 -0.10 -2.93
Hungary 324.65 324.77 +0.04 -4.35
Romania 4.64 4.64 -0.03 +0.71
Serbia 118.15 118.27 +0.10 +0.21
Russia 67.71 68.07 +0.53 -14.84
Kazakhstan 367.92 371.17 +0.88 -9.55
Ukraine 28.16 28.10 -0.21 -0.05
South Africa 14.89 14.91 +0.13 -17.00
Kenya 100.70 100.80 +0.10 +2.38
Israel 3.58 3.58 +0.14 -2.75
Turkey 6.34 6.31 -0.38 -40.21
China 6.87 6.85 -0.19 -5.26
India 72.47 72.53 +0.08 -11.92
Brazil 4.13 4.13 -0.05 -19.88
Mexico 18.83 18.84 +0.04 +4.35
Debt Index Strip Spd Chg %Rtn Index
Sov'gn Debt EMBIG 385 1 .01 7 68.64 1
Reporting by Claire Milhench; additional reporting by Helen Reid, Editing by William Maclean