LONDON, July 14 Russian stocks fell 0.8 percent on Monday and the rouble tumbled to one-week lows on fears that a fierce Russian response to the death of a citizen in cross-border shelling would re-ignite the conflict with Ukraine.
While MSCI's emerging index stayed off recent 13-month highs , the Russian losses came against a backdrop of broadly stronger equities, with Chinese shares up 1 percent while Polish, Turkish and Hungarian markets gained 0.5-1.0 percent.
Moscow threatened Ukraine with "irreversible consequences" after a Russian man was killed by a shell fired across the border, while Kiev said Ukrainian warplanes struck again at separatist positions in the east of the country.
Russian credit default swaps (CDS) rose two basis points to 10-day highs of 175 bps. The rouble slipped 0.4 percent versus the dollar and Moscow stocks moved off the 8-1/2 month highs hit last week when tensions had appeared to ease.
Sentiment was also dented by oil prices at three-month lows.
"Basically the story is, we are still seeing an easing of tensions compared with a couple of months ago but we are having renewed jitters. Obviously the activity over the weekend is a bit worrying," said Lars Christensen, chief emerging markets analyst at Danske Bank in Copenhagen.
But he added that market was still betting that there would not be military conflict between the two countries and that would prevent a spillover into markets elsewhere.
The flare-up in Israeli-Palestinian violence weighed on Israeli assets, with debt insurance costs spiking to three-month highs, up 5 bps on the day and 12 bps since end-June. But the shekel was stable and shares rose 0.6 percent to three-week highs.
Stocks in nearby Egypt also rose 0.6 percent
"From an Israeli market perspective this is not good news but ... it seems like for now there is no indication anybody else in the Middle East is getting dragged in," Christensen said.
Rising political tensions over the weekend hit stock and currency markets in the Balkan states too.
Bulgarian stocks slumped 2 percent to two-week lows after the central bank said on Friday it would allow troubled Corpbank to collapse. It pledged to guarantee depositors' money but bank shares still suffered.
CorpBank's dollar bond maturing Aug. 8 was marked sharply lower at 65-70 cents in the dollar but no trades were concluded, analysts said. Bulgaria has promised to protect bondholders.
"The general perception is that the bank will not default ... although strictly speaking an event of default has occurred, and the central bank made no specific reference to the Eurobond in its statement last Friday. The vagueness of the situation is causing some nervousness," Jefferies analyst Richard Segal said.
The Serbian dinar weakened to one-week lows to the euro and Belgrade stocks briefly fell 1 percent after the weekend resignation of finance minister Lazar Krstic who cited lack of support for his tough spending cuts ahead of loan talks with the International Monetary Fund.
Earlier, election jitters pushed Indonesia's rupiah down 0.7 percent while Jakarta stocks fell 0.2 percent. Business-friendly Joko "Jokowi" Widodo and ex-general Prabowo Subianto both claim victory in the presidential election.
Societe Generale advised buying dollar versus rupiah, adding that even a Jokowi win would not ensure a lasting rupiah rally.
"Jokowi is unproven at the national level and navigating a fragmented parliament to maintain a majority coalition could be challenging. Also, a small margin of victory does not lend itself to effective policymaking," Societe Generale added.
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 Chris Vellacott; Editing by Ruth Pitchford)