EMERGING MARKETS-Russia, Ukraine fall on tensions, wider market rises

Fri May 2, 2014 6:37am EDT

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(There will be no EMERGING MARKETS report datelined LONDON on Monday, May 5, due to a public holiday)

By Carolyn Cohn

LONDON May 2 (Reuters) - Russian and Ukrainian assets fell on Friday on heightened tensions in Ukraine, bucking a generally stronger trend across emerging markets ahead of key U.S. employment data.

Ukrainian forces attacked the rebel-held city of Slaviansk before dawn on Friday and pro-Russia separatists shot down at least one attack helicopter, killing a pilot, in a sharp escalation of the conflict.

Separatists also seized the control centre for Donetsk railways in eastern Ukraine, all but stopping trains from running, a spokesman for the railway said.

Russian stocks fell 0.5-1.2 percent but were still on course for a slight rise this week, while the rouble dropped more than half a percent against the dollar.

The cost of insuring Russian debt against default rose, with five-year credit default swaps up 12 basis points at 272 bps, according to Markit data.

Volumes were thin, however, with many traders not working on Friday following Thursday's May Day public holiday.

Ukraine's five-year CDS also rose 11 bps, to 1,201 bps, and its dollar bonds fell up to one cent on the dollar.

Investors are concerned about a possible ratcheting up in sanctions against Russia.

Republican U.S lawmakers this week proposed sanctions on Russian firms including Sberbank, Gazprom and Rosneft.

"Russian assets are implicitly priced for more downside," said Manik Narain, emerging FX strategist at UBS.

"We don't really know what the financial implication of sanctions will be, but liquidity will be hurt, you may not be able to get out of positions as easily as in a normal market."

The MSCI emerging equities index rose 0.3 percent, following holidays in many markets on Thursday and before U.S. April employment data at 1330 GMT. The index was on course for a modest 0.6 percent rise this week.

Chinese markets remained shut on Friday.

Turkish stocks rallied 2 percent to the year's highs after a string of forecast-beating first quarter results.

Emerging sovereign debt spreads tightened by 4 basis points to 313 bps over U.S. Treasuries, and inflows to emerging bond funds continued, according to banks citing data from EPFR.

In central Europe, currencies were steady. Poland's manufacturing sector grew at its slowest rate in nine months in April, defying analysts forecasts of a pick-up, as the Ukraine-Russia crisis and lower European demand weighed on exports, a survey showed on Friday.

Emerging markets have generally posted gains in recent weeks, with valuations looking attractive and effects of the Federal Reserve's gradual stimulus withdrawal priced in.

But further gains may be harder to come by.

"You have already seen a significant volatility compression in emerging market currencies and CDS spreads, with the exception of Venezuela, Russia and Ukraine," Narain of UBS said.

"They have compressed towards pre-taper levels, so a lot of the risk premium in emerging markets has been priced out."

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 ) (Additional reporting by Sujata Rao; Editing by Catherine Evans)

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