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UPDATE 1-EMERGING MARKETS-Turkey's lira surges after unexpected rate hike

Thu, 24th Sep 2020 12:46

* Turkish cenbank says inflation was higher than expected

* MSCI EM currencies index set for worst day since March

* Johannesburg trading shut on Heritage Day

* FTSE Russell's annual review of govt bonds index in focus
(Updates with lira's reaction to central bank policy decision,
adds comments, details on EM bonds)

By Medha Singh

Sept 24 (Reuters) - Turkey's lira charged higher against the
dollar on Thursday as investors cheered the central bank's
surprise move to raise its policy rate, while emerging market
stocks dropped to two-month lows.

After hitting a series of record lows, the lira
climbed 1% as the central bank said a fast recovery from the
initial coronavirus pandemic shock sent inflation higher than
expected, prompting it to hike interest rates by 200 basis
points after nearly a year of aggressive rate cuts.

Economists were expecting back-door tightening measures
while rates stay on hold.

"Massive surprise, and positive. Suggests the (central bank)
listened to the market and decided they had to move to avoid a
disorderly devaluation and potential balance of payments
crisis," said Tim Ash at BlueBay Asset Management.

"They are not out of the woods yet, but they have given
themselves a fighting chance."

The lira has lost over 20% versus the dollar this year,
making it one of the worst performing currencies due to worries
about Turkey's depleted forex reserves and sharply negative real
interest rates.

The lira was also supported by easing tensions over
sanctions from the European Union after Ankara agreed to talks
with Greece over maritime claims, although a date for
discussions had not been decided yet.

Stocks in Istanbul climbed about 1%.

Meanwhile, MSCI's emerging market index for stocks
dropped 1.8% while the currencies headed for the
steepest one-day percentage decline since March, on risk
aversion due to concerns over the slowing pace of economic
recovery and lack of fiscal stimulus.

The Russian rouble hovered near six-month
lows. South African financial markets were shut on Thursday for
Heritage Day.

Emerging market bonds also came under pressure with the
premium investors demanded to hold hard-currency debt over U.S.
safe-haven treasuries. The JPMorgan EMBI Global Diversified
index hit a two-month high of 441 basis points.

Focus will also be on FTSE Russell's annual review of its
World Government Bond Index on Thursday, where the index
provider is widely expected to add Chinese government bonds,
potentially opening the way for more foreign participation in
China's $16 trillion bond market.

Malaysia sovereign bonds are also under review while
Argentine stocks could be stripped from frontier market status
amid capital controls last week.

For GRAPHIC on emerging market FX performance in 2020, see http://tmsnrt.rs/2egbfVh
For GRAPHIC on MSCI emerging index performance in 2020, see https://tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see
(Reporting by Medha Singh in Bengaluru; Editing by Devika
Syamnath and Bernadette Baum)

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