EMERGING MARKETS-China shares drag on tensions with the West; Lira drops 1%

June 15 (Reuters) – Chinese blue-chip shares, reopening after a holiday, posted their biggest one-day drop in a month on Tuesday following fierce G7 criticism of Beijing, while broader emerging market equities looked set to snap a three-day streak of gains.

Geopolitics weighed too on Turkish assets, with the lira losing 1% after an Ankara-Washington meeting failed to yield breakthroughs. Analysts said emerging market currencies were generally jittery before the U.S. Federal Reserve’s two-day meeting.

MSCI’s Asia-heavy index of EM equities was flat to weaker on the day. While most other bourses in Asian rose between 0.1% to 0.9%, these were countered by losses of 0.7% to 1.1% on mainland China and Hong Kong stocks.

“It is a combination of nervousness ahead of the Fed and the G7 signaling that it is standing together to stand up to China,” said Jakob Christensen, chief analyst at Danske Bank in Copenhagen.

The Group of Seven countries criticised China over human rights, Hong Kong’s autonomy and the origin of the coronavirus pandemic. Beijing denounced the statement as a gross interference in the country’s internal affairs.

Any action against China will spill over into Asian economies and markets, investors fear, with memories still fresh of the tit-for-tat trade wars under Donald Trump’s administration.

Strained ties with Washington have also weighed on Turkish markets, with Ankara’s planned purchase of NATO-incompatible Russian S-400 defence systems a particular sticking point.

President Tayyip Erdogan’s meeting with his U.S. counterpart, Joe Biden, did not deliver much progress on points of conflict, pushing the lira back towards record lows hit against the dollar earlier this month.

Christensen said the summit with Biden was possibly less important for the lira than the Fed, citing fears of stimulus tapering “which could affect U.S. yields and the lira is super sensitive towards it”.

Focus will now turn to Biden’s Wednesday meeting with Russian President Vladimir Putin but despite severely frayed ties between the countries, the rouble firmed 0.3% on the day, tracking oil prices higher.

Western sanctions imposed so far on Russia have been limited while the currency has also been supported by a hawkish central bank.

The costs on insuring against default for Turkey and Russia are below 2020 peaks, but a second wave of the pandemic and rising geopolitical tensions have seen them tick up slightly this year.

Emerging currencies broadly are being supported by a generally weak dollar but investors are waiting to see if the U.S. Federal Reserve will on Wednesday signal changes in its accommodative policy stance — a more hawkish bent could send investors fleeing from riskier emerging market assets. For GRAPHIC on emerging market FX performance in 2021, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see tmsnrt.rs/2OusNdX

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