Rebound in Chinese shares powers broader rally

Aug 4 (Reuters) – Emerging market stocks made cautious gains on Thursday, with eyes on Chinese sabre-rattling, while currencies bided time ahead of some central bank policy decisions.

After a two-session sell-off on heightening US-China tensions over Taiwan, mainland China’s benchmark stock indices rose around 0.8% each, as the government launched infrastructure projects that were seen aiding the COVID-19-hit economy.

The mood lifted across Asia, carrying forward improved sentiment overnight after some strong US earnings updates as well as an unexpected pick-up in the US services sector assuaged worries about the world’s largest economy being in recession.

MSCI’s index of emerging market shares was up 0.5%, with Turkish stocks surging 1.4% to record highs, while South Africa’s top 40 FTSE JSE index rose 0.1%.

As the euro rose, currencies in the region were sluggish with eyes on central bank decisions from the Bank of England and the Czech Republic later in the day, and Romania’s decision on Friday.

Hungary’s forint slid 0.3% after a four-day rally over which it gained 2.6%.

The Czech crown was steady at near one-month lows. The central bank decision, the first under new governor Ales Michl, was seen as a toss-up with analysts split between expectations that interest rates will be held at 7% or raised by 25 basis points as inflation overshoots forecasts.

“We believe today’s meeting should confirm the Czech National Bank’s dovish change,” said Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“The Czech koruna has been in the CNB’s favored band… which is likely to force the central bank to be more active in the market.”

A Reuters poll showed space for central European currencies to firm in the next year remains tight.

Eyes on Thursday will also be on the BoE which is seen delivering a 50 bps hike to 1.75%, in what would be its biggest move since 1995.

Meanwhile, investors pared back the probability that the US Federal Reserve would raise the policy rate by 75 basis points next month after San Francisco Fed President Mary Daly said a half-percentage-point hike might be enough to tame inflation.

Another Reuters poll showed that the dollar’s strength has yet to peak, with the Fed expected to stay ahead of its peers in the tightening cycle by some measure and the global economy expected to slow significantly keeping up the greenback’s safe-haven appeal.

(Reporting by Susan Mathew in Bengaluru; Editing by Christina Fincher)