LONDON, March 18 Russia's rouble fell on Tuesday from the previous session's two-week highs on fears of fresh economic sanctions and a further military standoff, though Moscow equities firmed in line with other emerging markets.
Equities were generally stronger across emerging markets, lifted by big gains in Indian and Korea, while Russian shares extended the 3.6 percent rise posted on Monday after Western sanctions were seen as milder than expected.
But Moscow's defiant move towards formally annexing the Crimea region is keeping alive tensions with the West. President Vladimir Putin is expected to back absorbing the territory into Russia when he addresses parliament later in the day.
HSBC strategist Murat Toprak said investors would scan Putin's speech for clues as to whether military intervention was likely for the rest of Ukraine. The rouble weakened 0.6 percent against the dollar.
"The Crimea election is a done deal, the market wants to know if there is any intention to go beyond Crimea. This is one of the concerns of the market," Toprak said.
Fears the West will respond with fresh, more stringent sanctions are reflected in the offshore rouble forwards, which continue to trade at a rare premium to onshore contracts on fears that future local settlements could prove difficult.
In neighbouring Ukraine, the hryvnia fell more than 4 percent to the dollar. Investors are waiting to see the result of an IMF mission to Kiev which concludes on Friday. Currency flexibility is one of the IMF's demands.
"What happens to hryvnia depends on whether the central bank is intervening and given the level of their FX reserves I'd expect that authorities would not stand in the way of the currency," said RBS analyst Tatiana Orlova.
"On the basis of fundamentals, hryvnia should move to 11 or 12 per dollar."
While broader emerging markets have been boosted by better economic data from many countries, including the so-called Fragile Five, gains were seen capped by Chinese developments.
The yuan traded almost at one-year lows to the dollar after the central bank's weekend move to widen its trading band, indicating it was willing to tolerate more currency volatility. Traders expect more weakness as the economy loses steam.
"The China backdrop is not very supportive - all these uncertainties about potential bankruptcies - this is a market concern, it's not very positive for emerging markets," Toprak said, referring to recent corporate difficulties.
Chinese stocks ended flat but MSCI's emerging markets index rose 0.2 percent, buoyed by gains in Seoul which posted the biggest one-day rise in two weeks and in Mumbai where foreign buyers pushed shares to record highs before elections.
Overseas funds have bought a net $1.6 billion worth of Indian shares in the past 20 sessions, while Goldman Sachs upped its recommendation on Indian shares to overweight.
Turkish equities were a quarter point higher but the lira fell 0.4 percent ahead of a central bank meeting that is expected to leave interest rates unchanged. The bank jacked up all its interest rates by 250-500 basis points at the end of January to protect the lira.
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