EMERGING MARKETS-Stocks slide on souring U.S.-China ties, Russian rate move eyed

Developing world stocks slipped on Friday as relations between the United States and China worsened, while Russia's rouble weakened ahead of an expected interest rate cut. In a tit-for-tat move, China ordered the United States to shut its consulate in the city of Chengdu, after Washington's demand this week that Beijing close its Houston consulate.

Developing world stocks slipped on Friday as relations between the United States and China worsened, while Russia's rouble weakened ahead of an expected interest rate cut.

In a tit-for-tat move, China ordered the United States to shut its consulate in the city of Chengdu, after Washington's demand this week that Beijing close its Houston consulate. "The ordering of the closure of the U.S.'s Chengdu consulate, along with a ratcheting up of the anti-China rhetoric amongst U.S. policymakers, has prompted further weakness as we come to the end of a week," said Michael Hewson, chief market analyst at CMC Markets UK.

The MSCI's index for emerging markets equities tumbled 1.7% but was still set to end the week higher after a massive stimulus agreement between European Union leaders and positive developments from a wave of coronavirus vaccine candidates. Most emerging-market stock indexes, including those in South Africa and Budapest, fell more than 1%.

The rouble weakened ahead of the central bank's decision on its key interest rate later in the day. Markets are expecting a cut between 25 and 50 basis points, to a fresh record low, as low oil prices and the coronavirus lockdown hit the economy. Analysts at Commerzbank said expectations have recently shifted in favor of a 50-basis-point cut following Central Bank of Russia Governor Elvira Nabiullina's remark last week that the latest inflation data will allow room for more rate cuts.

"As expectations shifted in this manner, the rouble came under modest weakening pressure in recent days and underperformed central and eastern European peers." South Africa's rand slipped against the dollar, a day after the South Africa Reserve Bank cut its benchmark lending by 25 basis points to a record low of 3.50% as expected.

Most emerging market risk assets have come off sharply from lows hit in March, but investors are keeping a close watch on rising numbers of coronavirus cases. Currencies in central and eastern Europe including those of Hungary, Poland, Romania, and the Czech Republic fell against the euro, which enjoyed a winning streak for all of July.

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