Beijing stimulus hopes lift emerging stocks, lira retreats

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-US trade war that could deal a harsh blow to the economy.

US 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% and Hong Kong shares rose 1.4%, helping MSCI’s benchmark emerging equities index gain 0.6%.

Tech-heavy South Korea and Taiwan also rose 0.4% while Poland led emerging Europe bourses, up 1% to trade at the highest level since mid-June.

But the expectations of further loosening in China drove the offshore yuan down 0.4% to a 13-month low. The onshore yuan also fell 0.3% to its lowest since June 2017 and the yield on 10-year Chinese government bonds climbed over 5 basis points to 3.58%.

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% ahead of the first central bank rate-setting meeting since the election. Turkish stocks also fell 0.5%.

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% 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%.

“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% against the dollar after Trump spoke warmly Mexico’s incoming president on Monday, saying he expected to get “something worked out” on Nafta.