By Sujata Rao
LONDON Feb 21 Signs of stabilisation on Ukrainian assets, on news of plans to hold early presidential elections and form a national unity government, helped lift emerging markets on Friday, although a sharply weaker yuan indicated looming headwinds for the sector.
All-night negotiations mediated by visiting European Union foreign ministers has resulted in a deal between President Viktor Yanukovich and the pro-Europe opposition though analysts warn this could be rejected by the population.
News of a possible end to the crisis and street violence that has killed at least 77 people this week also supported assets in nearby emerging markets in Turkey and Central and Eastern Europe.
Ukraine's dollar bonds rose about 3 points while the hryvnia currency also firmed against the dollar from record lows hit this week.
RBS analyst Tatyana Orlova played down the gains, noting the country is still in dire financial straits, given the fresh delay to the second tranche of a Russian loan that stands between Kiev and a debt default.
"This is not the end of the story. What I am reading is there is a deal but the devil is in the detail ... The urgent need is for a technocratic cabinet that could take steps to avert default," Orlova said.,
"The key thing to watch is the Eurobond maturing in June, if things are not clarified by then, we could see a default."
That June 2014 eurobond rose 1.7 point, according to Tradeweb while Ukraine's 2017 dollar bond rose 3.4 points to 87.3 cents in the dollar, off recent record lows of 83, according to Reuters data. The 2023 bond was 2.7 cents higher.
Debt insurance costs on Ukraine, which had hit their highest since 2009, also fell 40 basis points, while the hryvnia firmed 1.2 percent
The gains spilled into broader emerging markets too, with MSCI's main index up 0.6 percent off one-week lows. But it was on track for a weekly loss after two weeks of gains. Emerging equity funds saw their 17th straight week of outflows.
However Chinese mainland stocks erased a week of gains on back of the yuan's biggest weekly drop since 2012 which has sparked debate on whether the currency's trading band will be widened.
The offshore yuan slid past 6.10 per dollar, for its biggest one-day loss since October 2011 as traders unwound what has been one of the most popular carry trades this year following a weaker yuan in the mainland market.
"In the past few sessions the PBOC (China's central bank) has been guiding the midpoint of the daily U.S. (dollar) fix higher so there has been a bit of washout of positioning. It caught a lot of people off guard," UBS strategist Manik Narain said.
"The positive headlines from Ukraine are contributing to stabilisation in emerging markets today but if the yuan move extends it will become a significant headwind for emerging markets, especially Asia because Korea or Taiwan cannot let their currencies strengthen when the yuan is weakening."
Central European assets firmed, with shares in Polish and Hungarian banks PKO and OTP, both with Ukraine operations, rising between 0.7-1.2 percent.
The Russian rouble gave up earlier gains that were fuelled by the expectations of a Ukraine deal as well as by end-month tax payments. The currency fell 0.3 percent to the dollar, trading just off five-year lows hit earlier this week.
Orlova expected the rouble to extend losses.
"Preliminary data shows the population has started converting rouble deposits into hard currency which is a very negative trend. If it continues, weakening pressure on the rouble will resume," she said.
Elsewhere the Nigerian naira fell 1 percent in volatile trade then rebounded to opening levels on central bank intervention a day after respected central bank governor Lamido Sanusi was suspended by the president.
The Brazilian and Mexican currencies were flat in early trade versus the dollar .
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