* Turkish markets suffer after Washington imposes sanctions
* Lira breaches 5 per dollar level, Turkish dollar bonds tumble
* Chinese stocks drop more than 2 pct on escalating trade tensions
By Karin Strohecker
LONDON, Aug 2 (Reuters) - Washington ramping up the pressure in its trade conflict with China roiled emerging stocks on Thursday while a U.S. move to slap sanctions on NATO ally Turkey pummelled the country’s assets, sending the lira to fresh record lows.
MSCI’s emerging market stock index tumbled 1.3 percent in its steepest daily decline since late June after the U.S. administration said President Donald Trump was seeking to ratchet up pressure on China for trade concessions by proposing a higher 25 percent tariff on $200 billion worth of Chinese imports.
Chinese stocks were in the firing line. Both mainland and Hong Kong indexes plunged more than 2 percent with the former having suffered declines of a similar magnitude on Wednesday already. The losses leave the Shanghai Composite as the world’s worst-performing major stock index this year.
“This trade war is still weighing on emerging market sentiment,” said Inan Demir, senior emerging market economist at Nomura. “As long as we don’t have clarity and resolution on that front, the pressure on emerging markets will continue.”
Wednesday’s U.S. Federal Reserve decision to keep interest rates unchanged as expected while characterising the U.S. economy as strong had little impact on emerging markets, said Demir, adding overall sentiment was dominated by broader risk aversion amid the trade tensions.
Currencies reflected the sombre mood.
The yuan eased against the dollar even though the central bank set a firmer official midpoint for the first time in five days.
But Turkey’s lira took centre stage, pushing through the key 5 to the dollar level overnight to hit a fresh record low after Washington imposed sanctions on two Turkish ministers over the trial of an American pastor. Ankara has vowed to retaliate.
The battered currency has dropped nearly 5 percent in the past four sessions and has tumbled more than 25 percent since the start of the year. Turkey’s dollar-denominated bonds tumbled across the curve with many issues dropping nearly 2.5 cents, while credit default swaps soared to 6-1/2 year high.
The sharp deterioration in relations with Washington is just the latest tremor rippling through Turkish markets. Investors have been spooked by the president pushing for lower interest rates in the face of stubbornly high inflation and appointing his son-in-law to oversee the economy while ousting more familiar and market friendly faces, as well as a plethora of geopolitical tensions.
“There is a long list of issues, and imposing sanctions does not bode well to say the least for the resolution of other issues,” said Nomura’s Demir. “As long as these issues remain and especially if they escalate, the capital flows outlook for Turkey would be negatively affected.”
Investors are also awaiting the latest set of Turkish inflation data on Friday, with the annual reading expected to take another leg higher after coming in at 15.4 percent in June.
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Reporting by Karin Strohecker, Graphic by Claire Milhench, Editing by Catherine Evans