EMERGING MARKETS-Russian stocks set for 4th month in red, emerging index to end April flat

Wed Apr 30, 2014 6:14am EDT

* Investors waiting for outcome of Fed meeting

* Emerging markets weighed down by Ukraine-Russia dispute

* Markets taking breather before May Day holiday

By Sujata Rao

LONDON, April 30 (Reuters) - Russian stocks were headed on Wednesday for their fourth straight month of losses as separatist activity escalated in Ukraine, while broader emerging stocks also fell half a percent.

U.S. 30-year and 10-year bond yields held near one-week highs as data and robust company earnings paint a picture of a recovering economy. Higher yields on "safe" assets can make emerging markets less attractive.

Investors will wait to see what the U.S. Federal Reserve says at the conclusion of its two-day policy meeting later in the day. The bank is seen on track to withdraw another $10 billion from its monthly bond-buying programme.

Emerging markets are also weighed down by events in Ukraine and Russia, with armed pro-Moscow separatists storming government buildings in eastern Ukrainian towns, despite new U.S., European and Japanese sanctions on Russia.

Russian stocks initially fell 1 percent but later clawed back some losses, after a Western sanctions list that was less harsh than expected. But they are down 4.5 percent on the month and have lost more than 13 percent so far in 2014.

The rouble fell 0.3 percent to the dollar and five-year credit default swaps rose 5 basis points to 261 bps.

"We had a correction in dollar/rouble and a rebound in equities after sanctions turned out to be fairly mild but the fundamental story didn't change," said Luis Costa, head of CEEMEA FX and debt strategy at Citi.

"We are seeing a break-up in Russia's growth model, we will probably see economic contraction and all the channels of financing to Russia are being disrupted. Plus we are heading for a holiday and that's another reason to be long dollar."

The International Monetary Fund has cut its 2014 growth forecast for Russia and expects capital outflow of $100 billion this year, the Fund's mission chief to Moscow said on Wednesday.

Markets in Russia and much of Europe and Asia are shut on Thursday.

PORTFOLIO INFLOWS

Broader emerging stocks weakened and are flat on the month after posting gains in February and March while sovereign dollar bond yield spreads tightened 4 bps, outperforming underlying U.S. Treasuries.

Investors have been returning to emerging markets in recent weeks, with the Institute of International Finance estimating $25 billion in portfolio inflows over April adding to $55 billion received in the previous two months.

April has seen more than $60 billion in emerging hard currency bond issuance despite the absence of Russian borrowers.

Analysts say that despite the latest move up in U.S. yields, Treasuries, the underlying benchmark asset for emerging bonds, have stayed remarkably steady with the 10-year/30-year curve gradually flattening - a positive for emerging bond issuance.

"Markets are taking a breather today, knowing we are heading towards another Fed statement but in general people are less scared of a huge super-spike in U.S. rates," Costa added.

Elsewhere the Turkish lira rose 0.2 percent to the dollar while two-year benchmark bond yields fell to 9.22 percent, its lowest rate so far this year after the Central Bank Governor Erdem Basci hinted at the possibility of a rate cut.

He gave no timing but analysts said it would be a mistake for Turkey to reverse rate rises from January, given political risks before a presidential election and still-high inflation.

"I don't think we can say definitively that Turkey is out of the woods yet ... Any quick move now to cut rates would just be seen as the central bank responding to government pressure. Central bank credibility is absolutely on the line in Turkey at present," Standard Bank analyst Tim Ash said.

In central Europe, shares in Hungary's OTP Bank fell 1 percent just before a European Court ruling in a lawsuit that could impact the bottom line of OTP and other local banks.

Central European currencies rose against the euro after the single currency was dragged higher versus the dollar following inflation data that was seen as unlikely to spur the European Central Bank into pumping more money into the economy.

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 Alison Williams)

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