EMERGING MARKETS WEEK-Soaring commodities to weigh on prices

By Walter Brandimarte

NEW YORK, June 8 (Reuters) - Soaring commodity prices, so far a key supporter of emerging markets performance, may weigh on the high-yielding asset class this week as sky-high energy a and food costs threaten global growth.

With a barrel of U.S. crude oil at an all-time high of more than $138, investors are becoming increasingly concerned that inflation will force central banks to raise interest rates more aggressively, compromising growth.

"So far high commodity prices have been a positive factor, but I think we are getting to a point where this is going to reverse, at least in the short term," said Ricardo Amorim, New York-based executive director for emerging markets in WestLB.

"Inflation concerns will likely hurt the global growth outlook, weighing on global credit markets," added Amorim, who is responsible for managing WestLB's portfolio in emerging markets.

Emerging markets equities lost 2.25 percent last week on the benchmark Morgan Stanley's MSCI index .MSCIEF. More than half of those losses came on Friday, when the barrel of oil jumped more than 8 percent, leading the CRB commodities index .CRB to close at its highest level ever.

Yield spreads between emerging markets bonds and U.S. Treasuries, seen as an important measure of risk aversion, widened 11 basis points for the week, 10 basis points of which only on Friday, according to the JPMorgan EMBI+ index 11EMJ.

Still, emerging debt returns remained little changed for the week, keeping year-to-date gains of 2.1 percent intact.

High commodity prices have been key drivers for the good performance of emerging markets this year, as investors hope global demand for raw materials would continue to support growth in developing countries, which export them.

But inflation has been forcing several central banks in some emerging markets to tighten their monetary policies. And, just last week, European Central Bank President Jean-Claude Trichet said higher benchmark interest rates were "possible" in July.

In the United States, however, policymakers seem to be in a trickier situation, having to deal at the same time with inflation pressures and a stagnant economy, which was reflected on Friday's weak jobs report.

"Surging inflation poses the greatest near-term emerging markets risk, upping the needed degree of monetary tightening, reducing real incomes and harming trade competitiveness," RBC Capital Markets' analysts wrote in a research note.

The bank said it is "decisively defensive" in its emerging markets strategy and recommended investors to favor markets with strong economic fundamentals. (Editing by Maureen Bavdek)