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LONDON: Emerging stocks extended falls on Tuesday and currencies came under broad pressure from rising trade tensions and climbing US yields, although Turkey's lira rose on hopes Ankara could ease tensions with Washington.

MSCI's emerging market equity index fell 0.5 percent, with China stocks suffering the brunt of the declines  after the US and China imposed tariffs on each others goods on Monday, heightening concerns that an increasingly bitter trade dispute could hit global economic growth.

Heavyweight Hong Kong suffered a 1.6 percent fall after potential changes in funding options for house builders in China. However, losses were broad based with bourses from Russia and South Africa to Turkey all down.

"We have signs of a further escalation of the trade war between China and the US, and we see it as likely that a new round of tariffs will be announced ... very soon on the remaining part of the imports from China, and that will definitely weigh on emerging markets," said Jakob Christensen, head of EM research at Danske Bank.

"On top of that, you have US yields picking up and the market is anxiously waiting to see if the Fed is going to be more hawkish than they have been before."

US 10-year Treasury yields climbed above 3.1 percent to a fresh four-month high ahead of an expected interest rate hike from the Federal Reserve on Wednesday, adding to nervousness over funding costs for many emerging markets.

With the dollar steady, emerging currencies came under pressure with Asian currencies painting a cloudy picture.

China's yuan hit its weakest level in a month against the dollar, India's rupee flirted with record lows hit the previous week and the Philippine peso plumbed its lowest level since end-2005.

Meanwhile, South Africa's rand nudged 0.1 percent lower, while Russia's rouble strengthened 0.3 percent against the dollar, gaining support from oil prices hitting four year highs.

Turkey's lira struggled 0.2 percent higher to trade at just over 6 to the dollar in a second day of gains. On Monday, the lira jumped more than 2 percent after US Secretary of State Mike Pompeo said he expected talks with Turkish officials over the fate of a US pastor whose trial has strained relations.

"Turkey is facing two fronts - one if the stand-off with the US, and the other are the weak economic fundamentals," said Danske Bank's Christensen. "If they can solve the one with the US that will be quite a relief and we will see the dollar-lira going below 6 quite quickly if this is announced."

Copyright Reuters, 2018

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