China optimism props up stocks, currencies struggle

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Jan 23 (Reuters) – Equities in emerging markets regained ground on Tuesday, supported by news of potential steps by Chinese authorities to stabilise domestic stock markets, while regional currencies were mixed against a softer dollar.

MSCI’s index of emerging market equities .MSCIEF advanced 0.4% by 0900 GMT, with Hong Kong’s Hang Seng .HSI index leading the charge, jumping 2.6%.

Stocks in mainland China .CSI300 also ended higher after China’s cabinet said on Monday it will step up measures to stabilise market confidence. However the index was not far from five-year lows hit last week.

Policymakers are seeking to mobilise about 2 trillion yuan ($278.53 billion) as part of a stabilisation fund to buy shares onshore through the Hong Kong exchange link, according to a Bloomberg News report. China’s yuan CNY=CFXS firmed 0.3% against the dollar.

“This is a strong message that conveys Beijing’s intention to artificially support Chinese markets,” ING strategists said in a research note, but added it was only a temporary fix.

“Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks.”

Taiwan .TWII and South Korea’s .KS11 tech-heavy stock indexes also rose, tracking a positive finish on Wall Street overnight. Equities in Turkey .XU100 and South Africa .JTOPI gained over 1%.

Japanese shares .N225 surged to fresh 34-year highs as the Bank of Japan stood pat on ultra-loose monetary policy.

Assets in emerging markets (EM) have been under pressure this year due to concerns around China’s economic growth and reduced bets of U.S. interest rate cuts. Investors are now awaiting policy decisions from the European Central Bank (ECB) as well as South Africa and Turkey this week.

Indian shares .NSEI, .BSESN were among laggards on Tuesday, pulled down by a drop in shares of Zee EntertainmentZEE.NS.

Among currencies, the South African rand ZAR= came off three month lows to trade at 19.1161 to the dollar. However, the Israeli shekel ILS= and the Turkish lira TRYTOM=D3 were weaker.

A broader gauge of EM currencies .MIEM00000CUS was muted.

Sri Lanka’s central bank kept interest rates steady on Tuesday, in line with market expectations as a new tax threatened upward pressure on expenses. The country’s CSE index .CSE dipped 1.0% while the local currency LKR= was flat.

(Reporting by Amruta Khandekar; Editing by Angus MacSwan)

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