LONDON, March 18 (Reuters) - Russian stocks jumped 2 percent and the rouble firmed up after President Vladimir Putin said on Tuesday he did not want to see Ukraine divided any further, in comments that also boosted other emerging assets.
The rouble, which had traded more than half a point weaker against the dollar earlier in the day, reversed its losses and approached the two-week highs hit on Monday, when Western sanctions turned out to be less stringent than expected.
Moscow's defiant move to formally annex the Crimea region keeps alive tensions with the West.
But fears that the Kremlin may seek to take control of other areas of Ukraine eased after Putin said in a speech to parliament that he did not want to see Ukraine divided further. That sparked a rally on Russian equity markets, which rose to one-week highs.
Russia's 2043 dollar bond rose 3 points and its bond yield premium to U.S. Treasuries tightened 11 basis points on the EMBI Global index.
"The market is starting to price normalisation of the situation in Ukraine," said Regis Chatellier, emerging markets strategist at Societe Generale. "The probability that things could get worse in eastern Ukraine is reducing."
That was also reflected in debt insurance costs, with Russian five-year credit default swaps (CDS) falling 16 basis points from Monday's close to 254 bps.
"What the market was expecting that tensions in eastern Ukraine would be much more severe...Then you have Putin saying we don't have the intention to split Ukraine. The reality is at this point, sanctions will have a limited impact."
However the chance of more punitive sanctions in future are likely to cap rouble gains. The jitters are also reflected in offshore rouble forwards, which continue to trade at a rare premium to onshore contracts on fears that future local settlements could prove difficult.
Putin's comments fuelled gains in European equities too and sapped the bid for safe-haven assets such as the yen and German Bunds. Emerging equities rose 0.4 percent, extending tentative gains from earlier in the day.
Equities across emerging markets had been lifted by big gains in Indian and Korea earlier. Putin's speech also boosted markets in eastern Europe, with Hungarian stocks rallying almost 2 percent and Poland gaining half a percent.
In Ukraine however, assets weakened as it appeared Russia was likely to get away with annexing a part of its territory.
The hryvnia fell 4 percent to the dollar and Ukraine's CDS jumped 39 bps.
"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.
Turkish equities jumped almost 1 percent after Putin's comments and an expected no-change decision by the central bank. The lira pared its losses to trade 0.15 percent lower versus the dollar after the bank affirmed it would keep monetary policy tight after a round of whopping rate hikes at the end of January.
Latin American markets were calm in early trading.
Brazil's real was little-changed, while Chile's peso weakened slightly as traders sought out dollars to renew currency forward contracts.
Yields on Brazilian interest rate futures ticked higher as traders awaited a speech by central bank chief Alexandre Tombini at a Senate hearing later in the afternoon.
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