EMERGING MARKETS-Yellen comments buffer emerging assets against Ukraine tensions

Thu Apr 17, 2014 6:17am EDT

(There will be no London-based emerging markets report on Friday April 18 or Monday April 21 due to public holidays in the United Kingdom)

By Sujata Rao

LONDON, April 17 (Reuters) - Russian stocks pared gains on Tuesday after President Vladimir Putin accused the authorities in Kiev of plunging Ukraine into an "abyss".

But the rouble edged up for the second straight day on Thursday along with broader emerging assets as U.S. Fed chair Janet Yellen's comments on monetary policy overshadowed escalating tensions in eastern Ukraine.

Yellen affirmed that the Fed would deliver stimulus for some time to come, noting risks from persistently low inflation . That provided an across-the-board boost to emerging assets which have suffered from the prospect of higher U.S. interest rates and Treasury yields.

U.S. 10-year Treasury yields, the benchmark underlying instrument for emerging assets, are near 2.6 percent after hitting two-month highs above 2.8 percent earlier in April while the dollar fell against other major currencies.

That lifted Russian equity markets by more than half a percent while the rouble firmed 0.3 percent to the dollar despite U.S. President Barack Obama's threat of fresh economic sanctions against Moscow for its role in Ukraine.

In a televised call-in with the nation, Putin said Ukraine's presidential election campaign was being conducted in an "absolutely unacceptable way", accused Ukraine's leaders of committing a "grave crime" by using the army to quell unrest in the east of the country, and did not rule out sending in Russian troops.

But Manik Narain, strategist at UBS, noted that Yellen's dovish stance had even helped emerging markets shrug off a 6 percent slump in Google shares in after-hours trade after the company's earnings disappointed investors late on Wednesday.

"The Yellen comments are providing a buffer to emerging markets. The 10-year part of the curve is trading very well and that's a big deal for EM so there's been some strengthening at the margins," Narain added.

The broader emerging equity index rose 0.2 percent, up for the second day in a row, though it is around 2 percent off five-month highs hit earlier this month.

Some of the gains are being dampened by the tensions in Ukraine where armed pro-Russian separatists have seized swathes of territory. Kiev said three separatists were killed in an attack on the Ukrainian national guard overnight

Ukrainian, Russian and Western diplomats arrived for talks in Switzerland but a solution is seen as unlikely.

But the tensions had no impact on the hryvnia which has been appreciating ever since an emergency 300 basis-point rate rise on Monday. It hit a fresh two-week high against the dollar and has jumped more than 10 percent this week.

Ukrainian dollar bonds also rose off one-month lows, receiving a boost from news that Templeton bond fund manager Michael Hasenstab had maintained his exposure to the country.

Commerzbank however warned the trade faced headwinds and recommended "remaining sidelined".

"If all sides fail to reach some sort of an agreement today, we will enter the Easter celebrations with a very challenging backdrop, as the United States and the EU have vowed economic sanctions and general rhetoric has clearly become that much more confrontational," it added.

For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Editing by Ruth Pitchford)

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