* Emerging stocks at 3-week highs, China up 3 pct
* Emerging debt, FX firmer
* Ukraine politics worries investors
By Carolyn Cohn
LONDON, Oct 12 (Reuters) - Emerging stocks hit three-week highs for a second successive day on Wednesday and sovereign debt spreads tightened, helped by a jump in Chinese stocks and a more positive outlook on the euro zone debt crisis.
Markets have been in thrall to each step in the euro zone’s attempts to resolve its debt woes, and recent optimism has taken riskier emerging assets higher.
Slovakia’s parliament brought down the government on Tuesday by rejecting a plan to expand the euro zone’s rescue fund, but the outgoing government said it hoped to pass the measure by the end of the week with opposition support.
The next focus is the release of the European Union’s bank recapitalisation plan, due later on Wednesday.
Chinese shares got a large boost, taking the emerging equity index higher, on talk of sovereign wealth fund support for the banking sector.
The positive mood is also feeding into emerging European currencies.
“The market had positioned itself for much more emerging market FX weakness on anticipation that real money accounts would begin to unwind long currency bondholdings on the fear factor,” said Roderick Ngotho, CEEMEA FX strategist at RBS.
“Our expectation is that some of these hedges will come off. That’s a technical correction which has potential to have some legs. All the currencies seem to be getting some upside.”
The MSCI emerging equities index rose more than 1 percent to a three-week high and has staged a comeback of over 11 percent since Oct 4.
Chinese stocks jumped 3 percent from 2-1/2 year lows, helped after Central Huijin, the domestic investment arm of the country’s sovereign wealth fund, upped its stakes in the “Big Four” Chinese banks on Monday.
The Thomson Reuters emerging Europe index gained 1.5 percent and emerging sovereign debt spreads tightened by 12 basis points to 371 bps over U.S. Treasuries, their narrowest since Sept 21.
Hungarian stocks rose almost 2 percent to their highest in over a month, Russian stocks gained more than 3 percent to 12-day highs and Turkish stocks hit eight-day highs.
Most emerging European currencies were also firmer, with the rouble rising more than 1 percent to three-week highs against the dollar as Brent crude futures hurdled $111 a barrel, above the $108 level factored into Russia’s 2008 budget. The rand also gained more than 1 percent to two-week highs.
In a reminder of the stark mood of the previous three months, however, an HSBC index showed emerging economies grew at their slowest pace in more than two years in the July-September quarter, as manufacturing output turned negative after expanding for nine straight quarters.
The Kenyan shilling snapped a two-day slide to record lows as tea exporters sold large quantities of dollars. The central bank also said it was in the repo market to mop up 10 billion shillings ($94.21 million).
African frontier currencies have been sliding on domestic demand for dollars amid global risk aversion and rising food and fuel prices, but the Nigerian naira was also being supported on Wednesday by a 275 bp interest rate hike this week.
The cost of insuring Ukraine’s debt in the five-year credit default swap market was at elevated levels of 970 bps, close to Feb 2010 highs, according to Markit.
The United States, Russia and the EU reacted sharply to the Ukrainian court sentencing on Tuesday of former prime minister Yulia Tymoshenko to seven years in prison for abuse of office in relation to a 2009 gas deal with Russia that she brokered.
“We do not expect this to disbalance power in Ukraine by a large margin,” BNP Paribas analysts wrote in a client note.
“Nonetheless, the increased tensions do not bode well for Ukraine in the short term in light of its existing shortfalls with regards to the IMF programme.”
Ukraine was due to receive about $6 billion from the IMF this year to boost central bank reserves, but the Fund halted disbursements after the government delayed unpopular reforms such as raising household gas prices.
An IMF mission is due to visit Kiev later this month.