EMERGING MARKETS-Lira falls after ratings cut, shots fired at U.S. embassy

LONDON, Aug 20 (Reuters) - The Turkish lira fell on Monday after S&P Global and Moody’s downgraded the country’s sovereign credit rating further into junk territory and shots were fired at the U.S. embassy in Ankara, while emerging stocks rose over 1 percent.

The battered lira tumbled 1.5 percent and Turkish sovereign dollar bonds fell across the curve with some issues down as much as 1 cent, as economic and political risks continued to weigh on investor sentiment.

S&P Global cut Turkey’s rating to B+ from BB- after markets closed on Friday, citing the extreme volatility in the currency and forecasting a recession next year.

Meanwhile Moody’s lowered its rating on Turkey to Ba3 from Ba2 and changed the rating outlook to negative, highlighting the weakening of public institutions and the reduction in the predictability of policymaking.

Piotr Matys, a strategist a Rabobank, said the downgrades were not a major surprise and had validated concerns among market participants that Turkey was unlikely to avoid a significant slowdown, with the sharp fall in the lira posing a risk to financial stability.

The lira has lost some 38 percent of its value against the dollar this year, with the fall accelerated by a dispute with the United States over Turkey’s detention of an American pastor.

On Friday a Turkish court rejected his appeal for release, drawing a stiff rebuke from U.S. President Donald Trump.

Adding to the pressure, shots were fired at the U.S. embassy in Ankara on Monday. “There is a risk that this incident may raise tensions even further,” said Matys. “It’s crucial how the Trump administration responds to this.”

Turkish markets will begin a public holiday from midday lasting until the end of the week, which will reduce liquidity and could amplify lira volatility. One bright spot was that Qatar and Turkey’s central banks signed a currency swap agreement to provide support.

Turkish stocks bucked the negative trend for Turkish assets, up 1.8 percent, but this reflected a broad-based rally across emerging equities, with MSCI’s benchmark emerging stocks index bouncing 1.1 percent.

Asian bourses set the tone with Hong Kong shares up 1.4 percent, Chinese mainland stocks 1.1 percent and Indonesia leapt 2 percent.

Investors are awaiting trade talks between China and the United States this week that many hope will go some way towards resolving the escalating tariff war between the two. Both are set to implement another round of tariffs on Aug. 23.

China’s yuan also firmed 0.4 percent to hit a 10-day high after 10 straight weeks of declines.

Analysts at Danske Bank noted that renminbi depreciation had stalled since China pushed up offshore money market rates.

“It sends a signal that China would like to slow the CNY depreciation on the back of recent signs of rising capital outflows and possibly to not add fuel to the fire in coming trade negotiations with the U.S.,” they said in a note.

“We expect the CNY to move sideways before resuming a gradual weakening against the USD on diverging monetary policy.”

Indian shares rose 0.7 percent to fresh record highs and the rupee firmed 0.7 percent off a record low hit last week.

The bullish mood continued into the European session with Russian stocks up 0.8 percent, Polish shares up 0.9 percent and South African stocks up 1.3 percent.

The rand also firmed 1.2 percent against the dollar, leading currency gains.

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on year

Morgan Stanley Emrg Mkt Indx 1034.46 +11.52 +1.13 -10.70

Czech Rep 1061.14 +3.09 +0.29 -1.58

Poland 2238.32 +20.58 +0.93 -9.06

Hungary 36436.96 -36.03 -0.10 -7.47

Romania 8199.89 +14.40 +0.18 +5.75

Greece 718.75 +8.40 +1.18 -10.42

Russia 1066.69 +13.95 +1.33 -7.60

South Africa 51236.90 +635.01 +1.25 -2.47

Turkey 90245.51 +1510.75 +1.70 -21.75

China 2698.47 +29.50 +1.11 -18.41

India 38307.43 +359.55 +0.95 +12.48

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 25.70 25.68 -0.09 -0.67

Poland 4.30 4.29 -0.11 -2.81

Hungary 323.48 322.61 -0.27 -4.00

Romania 4.65 4.65 +0.05 +0.58

Serbia 117.91 117.90 -0.01 +0.42

Russia 67.09 66.97 -0.17 -14.06

Kazakhstan 361.07 361.37 +0.08 -7.83

Ukraine 27.68 27.74 +0.22 +1.68

South Africa 14.46 14.64 +1.21 -14.55

Kenya 100.80 100.73 -0.07 +2.28

Israel 3.67 3.66 -0.30 -5.22

Turkey 6.08 6.01 -1.17 -37.71

China 6.85 6.87 +0.35 -5.02

India 69.62 70.09 +0.68 -8.31

Brazil 3.91 3.91 -0.04 -15.34

Mexico 18.88 18.89 +0.04 +4.04

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 390 1 .01 7 68.97 1

Reporting by Claire Milhench Editing by Gareth Jones