* Lira finds respite after steps to restrict FX lending
* Stocks, currencies steady after Wall Street rally on Friday
* Russia pitches into first major external bond default in century
By Sruthi Shankar
June 27 (Reuters) - A gauge of emerging market equities hit two-week highs on Monday, driven by cooling bets of big U.S. interest rate hikes and easing COVID-19 restrictions in China, while the rouble stayed volatile as Russia defaulted on its foreign sovereign bonds for the first time in decades.
The MSCI's index of developing world stocks rose 1.5% to its strongest level since June 13 before easing slightly.
The global mood got a lift after Wall Street's strong rally on Friday as signs of slowing economic growth and a recent retreat in commodity prices led investors to question how high the Federal Reserve will raise interest rates.
Meanwhile, heavyweight Chinese stock markets gained as Shanghai's top party boss declared victory over COVID-19 after the city reported no new local cases for the first time in two months.
Still, the emerging market (EM) stock index and its currencies counterpart were heading for their worst quarter since the pandemic-driven rout in March 2020 as factors ranging from a strong dollar, aggressive interest rate hikes in developed world economies and surging inflation have driven investors to safer assets such as bonds and gold.
"The downward revision in U.S. long-term inflation expectation is helping improve the sentiment," said Jakob Christensen, chief analyst, head of emerging market research at Danske Bank. "But we think it's a bit early to call the trough in the market."
The rouble firmed 0.3% to 53.2 per dollar, having shed 2% earlier in the session as Russia defaulted on its external debt for the first time in more than a century, although the Kremlin rejected the characterisation of events as a default.
"The damage is already done in the sense of cutting off Russia from the global financial markets. It's nothing like what we typically see in the EM space when a country defaults on the debt. It's all priced in," added Christensen.
Russia has struggled to keep up payments on $40 billion of outstanding bonds, hit by sweeping global sanctions imposed over its invasion of Ukraine on Feb. 24.
The Group of Seven rich democracies will finalise plans for a price cap on Russian oil, a senior U.S. official said on Monday.
The Turkish lira strengthened about 2% to trade at 16.72 per dollar after Turkey moved to restrict lira lending to many companies with more than $1 million in foreign currency cash in the latest step to reverse a slide in the currency.
The lira, among the worst performing currencies this year, hit a one-month high at 16.03 per dollar earlier in the session, before paring gains.
"With this rule, the BRSA (Turkey's Banking Regulation and Supervision Authority) is basically saying to firms: sell your FX now; buy later in the spot market if you need it for debt redemptions or raw-material purchases," Ercan Erguzel, an economist at Barclays said in a note.
"We see a risk that foreign lenders might be reluctant to fully roll over existing debt. Medium term, we do not expect the new measure to be positive for FX liquidity or investment."
For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX
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For RUSSIAN market report, see (Reporting by Sruthi Shankar in Bengaluru Editing by Mark Potter)