EMERGING MARKETS-Stocks bounce, Hungary gets reprieve
* Emerging stocks jump over 2 pct, debt spreads snap in
* Hungary forint rises 1 pct vs euro, yields drop
* Egypt pound at nr-7 year low as elections start
By Carolyn Cohn
LONDON, Nov 28 (Reuters) - Talk of International Monetary Fund aid for Italy, swiftly denied by the IMF, triggered a turnaround in risky emerging markets on Monday after days of losses.
In broadly improved markets, which analysts said still looked fragile given scepticism over the chances of a swift resolution of Europe's debt crisis, Hungary made a strong recovery boosted by its own move to turn to the Fund.
The end of the U.S. Thanksgiving weekend also encouraged investors to change tack, and several emerging central banks hold rate decisions this week, adding to reluctance to take extreme positions.
"This is a very short-term correction which is very common after weeks of sell-off," said Cristian Maggio, emerging markets strategist at TD Securities.
"There is no material solution of the euro zone crisis and we are unlikely to see anything like that for the next several weeks."
The MSCI emerging equities index rose over 2 percent, after three successive sessions of hitting multi-week lows.
Emerging Europe has been looking particularly vulnerable to the euro zone crisis. The Thomson Reuters emerging Europe index rose 1.5 percent, after hitting 18-month lows on Friday.
Russian stocks rose over 3 percent to one-week highs as oil climbed on Iran supply worries.
Iran's parliament voted on Sunday to reduce diplomatic relations with Britain, with one lawmaker warning that Iranians angered by London's latest sanctions could storm the British embassy as they did the U.S. mission in 1979.
Emerging sovereign debt spreads snapped in 16 basis points to 386 bps over U.S. Treasuries, narrowing back below the psychologically key 400 bps level.
Emerging currencies were generally stronger, with the rand up 2 percent against the dollar and the forint rising nearly 2 percent against the euro.
Hungary's currency and debt have been under severe pressure on concerns about its debt burden and unorthodox policy steps.
Hungary's domestic bond yields fell by 50 bps on Monday's improved mood after the economy minister said late on Friday the government would cooperate with the IMF, EU and banks to stabilise the economy.
Hungary's debt insurance costs hit record highs on Friday, but fell 14 bps on Monday to 631 bps in the five-year credit default swap market, according to Markit.
Hungary's central bank makes its monthly policy decision on Tuesday, and speculation of a rate hike was also supporting the forint.
"The central bank faces a tough choice between leaving rates on hold or hiking rates aggressively...We favour the first option but believe that the second will be debated in depth," said Unicredit analysts in a client note.
"The issue at this stage is clear -- a need to stabilise investor confidence."
The zloty recovered some ground from its lowest in nearly 2-1/2 years set on Friday.
However, the shekel hit 14-month lows on expectations of a rate cut later in the session.
"The market is pricing about 70 percent probability of a cut today and a full 25 bps cut within three months," said analysts at Societe Generale in a client note.
Saboteurs blew up Egypt's gas pipeline to Jordan and Israel on Monday, witnesses and security sources said, a few hours before Egypt holds its first free election since President Hosni Mubarak was toppled in February.
The Egyptian pound hit its highest in nearly seven years, despite a 100 bps hike in the overnight deposit rate last week, the first rate rise in over two years.
Egypt's debt insurance costs bucked a generally falling trend on Monday, rising 6 bps in the five-year credit default swap market to 555 bps, according to Markit.
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