EMERGING MARKETS-Stocks hit 1-week low, Ukraine FX at 4-year lows

LONDON Thu Dec 12, 2013 6:09am EST

LONDON Dec 12 (Reuters) - Emerging stocks hit one-week lows on Thursday, led down by Asian stocks after a provisional U.S. budget deal pushed tapering expectations closer. Ukraine's hryvnia currency hit fresh 4-year lows.

The Republican-controlled U.S. House of Representatives was planning on Thursday to vote on a two-year budget deal, removing the spectre of a year-end fiscal fight.

A deal would make it more likely the Federal Reserve could ease up on the $85 billion-a-month bond-buying programme which has fuelled demand for risky assets, analysts said.

But analysts at Societe Generale said this was not necessarily negative longer term for emerging markets.

"An earlier initiation of QE tapering may provide some relief as it will be viewed by investors as lowering uncertainty surrounding Fed policies," they said in a note.

The MSCI emerging equities index fell 0.8 percent to one-week lows, and is down around 6 percent on the year, hurt by the prospect of tapering and by weak earnings growth.

Korean shares hit a four-week low closing low and Indian stocks dropped more than 1 percent, though Chinese shares were steady.

South African stocks fell nearly 2 percent, with steep drops in gold stocks, and emerging European stock markets all weakened, while currencies were steady to weaker.

Ukraine's hryvnia currency hit fresh four-year lows after the ditching of a landmark trade deal with the European Union triggered street protest.

President Vladimir Putin made a new attempt on Thursday to woo Ukraine, touting the economic benefits of joining a customs union with Russia and two other former Soviet republics.

Investors worry that without international aid, Ukraine will run out of hard currency and will struggle to support the hryvnia or to repay $7 billion in debts which come due next year.

Ukraine's currency forward markets are at their lowest in a year, and are pricing in a 10 percent depreciation in the currency within the next six months.

Short-term interest rates settled at lower levels after the central bank briefly engineered a rise in the currency and interest rates earlier this week.

Ukraine's more liquid dollar debt prices were steady to firmer, however, after a bounce from record or multi-year lows on Wednesday .

Some analysts say the bad news is already priced into Ukraine's debt.

"We eventually expect a relatively peaceful resolution of the crisis, likely involving negotiations with the president and a new round of EU association agreement discussions, which the president has already promised," said analysts at Bank of America Merrill Lynch in a client note.

Ukraine's debt spreads tightened by 11 basis points to 1,004 bps on JP Morgan's EMBI-Global index, after a sharp narrowing on Wednesday.

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