* Polish, Czech FX at new highs on rate hike expectations
* Turkish lira, stocks rebound but CDS near 1-year high
* Ukrainian hryvnia slips post currency band setting
By Sebastian Tong
LONDON, July 7 (Reuters) - Emerging equities recovered from
five-month lows on Monday cheered by overnight gains in Asia
while expectations of further interest rate hikes sent the
Polish zloty and the Czech crown further to new highs.
Turkish assets held steady even after the weekend arrests of
two former generals charge with plotting a coup.
Modest gains in core European markets coupled with a rally
in Asian stocks helped revive investor appetite for emerging
stocks, sending the benchmark index <.MSCIEF> 0.62 percent
higher by 1115 GMT to 1,036.75.
Last week's better-than-expected U.S. jobs data and
weakening oil prices also helped to ease concern that the world
economy was slipping into stagflation.
Emerging sovereign debt yields <11EMJ> narrowed 1 basis
point to trade at 301 bps over U.S. Treasuries while central
European currencies were firmer.
"It's a very benign trading session so far, with no major
moves. Investors are adopting a very much wait-and-see attitude
ahead of key data releases later in the week in most emerging
markets, mostly on the inflation front," said Elisabeth Gruie,
currency strategist at BNP Paribas.
FX STRENGTH
Expectations that inflationary pressures would prompt
further interest rate hikes in central Europe fuelled the rise
of the region's currencies, including the Czech crown <EURCZK=>
which rose 0.29 percent to a record high of 23.54 against the
euro.
Poland's zloty <EURPLN=> extended last week's gains to firm
0.09 percent against the euro to 3.31, emboldened by a Saturday
newspaper report quoting a monetary policymaker's opposition to
intervening to weaken the unit. []
"The zloty is one of the most freely floated in region. It
will remain dependent on flows, and for now the
balance-of-payment flows are overall positive. It's likely to
continue to rise in the coming months and until the end of the
year," said BNP's Gruie.
Bolstered by data showing its foreign currency reserves
rising to 17.290 billion euros at the end of June
[], the Hungarian forint rose 0.49 percent against
the euro, to its highest level since January 2001.
The Slovak crown <EURSKK=> was 0.08 percent firmer versus
the euro, a day ahead of the setting of its official rate
against the common currency.
The Ukrainian hryvnia, however, softened 0.33 percent to
trade at 4.59 against the dollar <UAH=> below the official
currency band of 4.656-5.044 set on Friday. []
"We're seeing a massive unwinding of Ukrainian risk in the
market following the recent credit ratings downgrade of the
country," said Luis Costa, Commerzbank emerging market debt
strategist.
The cost of insuring Ukrainian debt against default has
risen with five-year credit default swaps (CDS) for the country
now trading at around 413 bps, he noted.
Growing political instability in Turkey following a widening
probe into an alleged coup plot is also keeping its CDS levels
close to a one-year high, with five-year paper priced at about
333 bps.
However, Turkey's stock market <> rebounded 1.1
percent higher following losses last week while its lira
currency <TRY=> inched up 0.20 percent following Friday's
central bank report on inflation.
"The central bank's tone in the monthly inflation report was
neutral giving away little regarding bank's likely policy action
in its July meeting. But the strong emphasis on the core trend
leads us to believe that the bank is still looking to tighten,"
said Goldman Sachs in a report.
(Additional reporting by Alastair Sharp; Editing by Ruth
Pitchford)
