Stocks set for worst week in five months

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  • GS says willing to consider risk in EM
  • Mainland China losses push EM stocks into negative territory
  • Russian assets steady after Thursday's rally on easing tensions

Jan 28 (Reuters) - Emerging market stocks were set on Friday for their worst week in five months, weighed down by a hawkish U.S. central bank and geopolitical worries, even as fears of an imminent escalation in tensions over Ukraine seemed to have eased.

MSCI's index of emerging market stocks (.MSCIEF) steadied after a steep sell-off a day earlier, when comments from Fed Chairman Powell saw markets raise bets for an aggressive monetary policy tightening cycle this year.

While most bourses firmed, China markets saw a late-session rout ahead of a week-long Lunar New year holiday, while the yuan rose 0.2% after its worst session since March 2020 when pandemic panic gripped the market.

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The China-heavy EM stocks index was on course for a weekly decline of 4.3%.

"Despite ongoing Fed risk, we have become more willing to consider risk in parts of the EM complex, as China easing and fatter risk premia provide cushions that are harder to find in the DM world," Goldman Sachs said in a note.

The EM stocks index is down about 3% this year, faring better than the S&P 500 (.SPX) and the all-country index (.MIWD00000PUS), which are down about 8%, weighed down by high value stocks such as Apple (AAPL.O), Amazon and Google (GOOGL.O).

Fund flows- EM equities and bonds

Russian assets steadied after a day of strong gains that were spurred by both Moscow and Washington leaving the door open to more dialogue after the United States rejected Russia's demands about NATO security in eastern Europe. read more

The rouble hovered at 78 per dollar, having breached the 80 level earlier this week. Moscow stocks (.IMOEX) rallied 0.4%, and both Russian and Ukrainian dollar bonds firmed. ,

Russian stocks were set to outperform their EM peers with a 0.8% gain over the week.

But as uncertainty remains, analysts warn about Russian assets.

"We are now preparing for a longer-than-expected period of heightened Russia-related geopolitical risk... global investors are becoming more sensitive to Russian asset holdings," strategists at Citigroup said in a note.

"We believe uncertainty will continue, supporting the high volatility in RUB FX, bonds and other Russian assets."

Ukraine's hryvnia has fallen 5.3% this month, losing in 11 out of last 12 weeks.

Most other currencies recovered a day after the dollar ripped higher on hawkish Fed prospects. Elevated U.S. Treasury yields made for a cautious atmosphere.

South Africa's rand was flat after a dovish interest rate hike on Thursday, while Turkey's lira firmed 0.3% as economic confidence rose. The central bank on Thursday doubled Turkey's inflation forecast for the year.

The lira has seen a semblance of stability since measures were put in place in December to curb its free fall.

For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu

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