EMERGING MARKETS-Shares extend gains on recovery hopes but caution prevails

 Emerging market stocks rose for a third straight session and currencies firmed on Tuesday on hopes of an economic recovery, although simmering U.S.-China tensions kept risk appetite in check.

MSCI’s index of emerging market shares rose 0.7%, hitting a fresh 12-week high, with Chinese blue-chips up 0.3% on fresh stimulus, while most other Asian shares rose about 1%.

Risk assets had started the week on a strong note as more countries eased pandemic-induced restrictions and the U.S. action against a new security law for Hong Kong was less threatening than feared.

However, China’s move to restrict soybean and pork purchases from the United States showed tensions between the world’s two largest economies are far from easing.

“This could be a sign that China may be less willing to keep to the Phase 1 of U.S.-China trade deal as the U.S. continues to threaten China’s sovereign hold over Hong Kong and Taiwan,” said a team of analysts at Maybank led by FX research head Saktiandi Supaat.

Although the EM stocks benchmark has risen about 27% from its lowest this year, it is still down 14% on the year and worsening Sino-U.S. ties could deepen these losses.

Meanwhile, investors also kept a close eye for any economic consequences from violent protests in many U.S. cities against police brutality. Wall Street stock futures swung between losses and gains.

Among currencies, India’s rupee traded flat after Moody’s downgraded the country’s credit rating to just a notch above junk, in line with Fitch and Standard and Poor’s, citing slow economic growth. Moody’s maintained its negative outlook.

“Leaving the outlook at ‘negative’, rather than ‘stable’, suggests non-negligible risks of further downgrade in the near-term (in the next six months or so),” said Mizhuo analyst Hayaki Narita.

Russia’s rouble rose to a new three-month high. A report said Russia’s oil production fell in May, nearing its target output cut under an OPEC+ deal to stabilise oil markets. The organisation is to meet this month to discuss extending the cuts. Crude prices were up about 1% on Tuesday.

Currencies of South Korea, Taiwan and South Africa underperformed against a steady dollar, while Indonesia’s rupiah surged 1.4% on rising demand for government bonds ahead of a bi-weekly auction.

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