* Stocks down 0.7 pct after Monday's 4 pct gains
* Emerging European currencies, stocks hit
* Ukraine politics weigh; CDS rises, bonds down
By Sujata Rao
LONDON, May 11 (Reuters) - Emerging assets traded lower on
Tuesday, giving up some of Monday's massive gains as euphoria
over a $1 trillion emergency package to stabilise the euro zone
started to fade.
Emerging stocks dipped 0.7 percent, a day after posting
their biggest one-day gain in over a year <.MSCIEF>. The index
remains well off 19-month highs hit in April having fallen for
four weeks in a row, losing 9 percent last week on fears the
Greek debt crisis would spread to other weak euro zone
economies.
Emerging currencies also pulled back after Monday's
knee-jerk gains as investors started to focus again on the euro
zone's structural problems and on Greece in particular, where
there is strong public opposition to deficit-cutting measures.
"Some of the enthusiasm seems to have evaporated. The
question is can these countries cut their budget deficits as
promised and avoid a euro zone crisis, and there is scepticism
about that," said Nigel Rendell, emerging markets strategist at
RBC Capital Markets in London.
"That's weighing on emerging markets right across the board
but especially on the central European countries ... If we don't
get the recovery in Europe and the euro stays weak, these
markets will struggle," Rendell added.
While emerging assets are seen as benefiting from the
liquidity boost provided by the EU/IMF emergency package for the
euro zone announced early on Monday, and the U.S. offer to open
dollar swap lines for central banks, most analysts expect the
crisis to dampen euro zone growth this year.
Emerging Europe is heavily reliant for exports on Germany
and the rest of the euro zone and is therefore hard hit by a
weak euro. Stocks in Prague and Budapest <> <> fell 1.5
percent while Warsaw's stock market eased 0.5 percent <>.
Shares in Bucharest plunged 2.5 percent <>.
On currency markets, the Polish zloty fell 0.5 percent
<EURPLN=>, the Hungarian forint eased 0.6 percent <EURHUF=>
while the Czech crown firmed 0.2 percent <EURCZK=>.
"One important point looking at the zloty or Czech crown is
that central banks are happy with these levels, they see no room
or justification for stronger currencies," said ING Bank
strategist Agata Urbanska, citing interventions this year by
Poland and to a greater extent Romania.
The leu had lagged other emerging currencies' gains in the
previous session after the International Monetary Fund (IMF)
said it would disburse the next tranche of a 20 billion-euro
loan package only after Romania implemented more cost savings.
But it later agreed to a higher budget deficit target.
The leu softened 0.2 percent against the euro <EURRON=>.
UKRAINE; HUNGARY
Other problems are seen limiting gains in emerging assets.
Rising inflation is expected to force rate rises across many
developing countries in coming months, potentially curtailing
stock and bond gains. Politics are also weighing on some markets
such as Ukraine and Hungary.
In Ukraine, opposition supporters were marching on the
parliament to protest the extension of the Russian navy's stay
in the Crimea. The extension was granted by the new pro-Russia
government in return for cheaper Russian gas, vital for
Ukraine's struggling economy.
Ukraine's credit default swaps (CDS) surged again to 600
bps, rising 30 bps from the previous close. CDS also rose
slightly in Bulgaria, Romania and Turkey.
In Hungary, data showed inflation slowing further in April
but there are doubts if the central bank will be able to cut
rates this month by 25 bps as was earlier expected.
The bank came in for attack again on Tuesday by the new
government after repeated calls for the governor's resignation
[]. Seen as favouring a weaker forint, the government
accuses the central bank of focusing solely on inflation.
"It's a tough call (the rate decision) when you think of
what's happening domestically and you have an external
environment which is not stable," ING's Urbanska said.
Earlier, Chinese markets closed down almost 2 percent after
data showed April inflation at an 18-month high, raising
expectations for an interest rate rise.
"People are seeing the strong inflation as an excuse to sell
Asian equities," Rendell of RBC said.
Moscow markets bucked the generally weaker trend, with
shares <> jumping 4 percent as markets re-opened after the
Victory Day holiday and played catch-up with Monday's rally in
the rest of the world.
On global bonds, JP Morgan's EMBI Plus index <11EMJ> saw
emerging yield premiums to Treasuries rise 3 bps but the spread
stayed within 300 bps. Ukraine underperformed, widening 20 bps.
(Additional reporting by Sebastian Tong; Editing by Susan
Fenton)
