LONDON, Feb 3 (Reuters) - An unexpected Chinese interest rate raise on Friday hit emerging stocks led down by weakness across Asia, while the Turkish lira resumed its downward trajectory as data showed a sharp jump in inflation.
The Asian losses offset modest gains in Europe and put the benchmark emerging equity index on course to end the week flat, despite trading up earlier in the week on the back of strong factory data across the developing world.
Chinese mainland shares slipped 0.7 percent on their first day of trading after a week-long break for Lunar New Year, and Hong Kong shares fell 0.2 percent, as Beijing raised short-term interest rates by 10 basis points.
The signs of a move towards tighter policy overshadowed data showing Chinese factory activity expanded for the seventh straight month in January, albeit at a slower rate.
Many linked the move to Beijing's efforts to alter expectations of a one-way path for the yuan as expectations of currency weakening have contributed to huge capital outflows.
"The slide in the renminbi that we saw last year has reversed in January - the local authorities want to provide more support for the currency against the dollar or other currencies they have trade flows with," said Cristian Maggio, a strategist at TD Securities.
The move pushed the Chinese yuan a touch firmer while 10-year bond yields hit the highest since August 2016 before easing. The Taiwan dollar hit a 19-month high, but as the dollar recovered some losses most emerging currencies slipped.
The Turkish lira snapped a four-day winning streak, falling 0.4 percent against the dollar although it is on course for its best weekly gain since last May.
Economic data remains overwhelmingly negative, with consumer inflation jumping 2.46 percent in January, well above forecasts of 1.78 percent in a Reuters poll and inching towards a double-digit annual increase.
The government said it could temporarily remove a tax on white goods to support domestic demand, boosting shares in manufacturers Arcelik and Vestel by more than 3 percent at one point, the former surging to record highs .
The overall Turkish index was flat, although lira weakness has propelled it to the fourth straight week of gains.
Investors remain lukewarm on Turkey, noting deteriorating fundamentals and the central bank's reluctance to raise interest rates to rein in inflation, although there are signs some funds are being tempted to buy the beaten-down assets.
"We have had very little exposure to Turkey for a long time, since before the coup and our exposure has gradually reduced," said Kieran Curtis, a bond fund manager at Standard Life Investments.
"We've done very well by being underweight and that's the fact which is making it tempting to go back in rather than anything we see coming out of Turkey."
The Russian rouble weakened 0.2 percent against the dollar before a central bank rate-setting meeting later at which the bank is seen holding rates at 10 percent. The currency's gains have stalled since authorities said they would start buying hard currency to replenish depleted reserve funds.
Russia's services sector activity expanded at the fastest pace in 8-1/2 years in January, adding to evidence that the economy has turned a corner.
"In the long term (FX purchases) is a respectable goal that will add to Russia's strength and give the government some additional budget discipline. But at the same time it will help weaken the currency, smooth volatility, and reduce the correlation between the dollar/rouble exchange rate and oil prices," Maggio added.
South African stocks fell almost 1 percent to three-week lows, as the Chinese rate move hit commodity prices. A 5 percent fall in shares of iron ore miner Kumba also dragged on the market.
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg
Morgan Stanley Emrg Mkt Indx 915.44 +0.23 +0.03 +6.17
Czech Rep 942.91 +2.00 +0.21 +2.31
Poland 2071.02 +5.88 +0.28 +6.32
Hungary 32626.13 +50.97 +0.16 +1.95
Romania 7498.09 +24.48 +0.33 +5.83
Greece 623.39 +0.33 +0.05 -3.15
Russia 1177.82 +6.40 +0.55 +2.21
South Africa 45484.82 -377.16 -0.82 +3.61
Turkey 87300.63 -93.56 -0.11 +11.73
China 3140.65 -18.51 -0.59 +1.19
India 28221.78 -4.83 -0.02 +5.99
Currencies Latest Prev Local Local
close currency currency
% change % change
Czech Rep 27.00 27.02 +0.08 +0.04
Poland 4.30 4.31 +0.31 +2.39
Hungary 309.19 308.95 -0.08 -0.12
Romania 4.51 4.52 +0.10 +0.49
Serbia 123.93 123.97 +0.03 -0.47
Russia 59.47 59.32 -0.25 +3.01
Kazakhstan 323.46 325.30 +0.57 +3.15
Ukraine 27.01 26.92 -0.33 -0.04
South Africa 13.42 13.39 -0.19 +2.33
Kenya 103.60 103.80 +0.19 -1.19
Israel 3.76 3.76 -0.03 +2.40
Turkey 3.75 3.74 -0.30 -5.88
China 6.87 6.88 +0.07 +1.04
India 67.33 67.21 -0.19 +0.91
Brazil 3.12 3.12 +0.00 +4.15
Mexico 20.55 20.54 -0.04 +0.79
Debt Index Strip Spd Chg %Rtn Index
Sov'gn Debt EMBIG 341 -1 .01 7 53.01 1
Additional reporting by Sujata Rao; Editing by Tom Heneghan