By Claire Milhench
LONDON, Aug 20 (Reuters) - The Turkish lira fell on Monday after S&P Global and Moody's downgraded the country's sovereign credit rating further into junk territory and shots were fired at the U.S. embassy in Ankara, while emerging stocks rose over 1 percent.
The battered lira tumbled 1.5 percent and Turkish sovereign dollar bonds fell across the curve with some issues down as much as 1 cent, as economic and political risks continued to weigh on investor sentiment.
S&P Global cut Turkey's rating to B+ from BB- after markets closed on Friday, citing the extreme volatility in the currency and forecasting a recession next year.
Meanwhile Moody's lowered its rating on Turkey to Ba3 from Ba2 and changed the rating outlook to negative, highlighting the weakening of public institutions and the reduction in the predictability of policymaking.
Piotr Matys, a strategist a Rabobank, said the downgrades were not a major surprise and had validated concerns among market participants that Turkey was unlikely to avoid a significant slowdown, with the sharp fall in the lira posing a risk to financial stability.
The lira has lost some 38 percent of its value against the dollar this year, with the fall accelerated by a dispute with the United States over Turkey's detention of an American pastor.
On Friday a Turkish court rejected his appeal for release, drawing a stiff rebuke from U.S. President Donald Trump.
Adding to the pressure, shots were fired at the U.S. embassy in Ankara on Monday. "There is a risk that this incident may raise tensions even further," said Matys. "It's crucial how the Trump administration responds to this."
Turkish markets will begin a public holiday from midday lasting until the end of the week, which will reduce liquidity and could amplify lira volatility. One bright spot was that Qatar and Turkey's central banks signed a currency swap agreement to provide support.
Turkish stocks bucked the negative trend for Turkish assets, up 1.8 percent, but this reflected a broad-based rally across emerging equities, with MSCI's benchmark emerging stocks index bouncing 1.1 percent.
Asian bourses set the tone with Hong Kong shares up 1.4 percent, Chinese mainland stocks 1.1 percent and Indonesia leapt 2 percent.
Investors are awaiting trade talks between China and the United States this week that many hope will go some way towards resolving the escalating tariff war between the two. Both are set to implement another round of tariffs on Aug. 23.
China's yuan also firmed 0.4 percent to hit a 10-day high after 10 straight weeks of declines.