EMERGING MARKETS-Emerging stocks hit by Fed, China policy-tightening nerves

By Claire Milhench

LONDON, Dec (Shanghai: 600875.SS - news) 12 (Reuters) - Emerging equities fell on Tuesday after two days of strong gains as markets looked to a U.S. Federal Reserve meeting and potential policy tightening in China, though a rise in the oil price to mid-2015 highs underpinned energy producers.

MSCI (Frankfurt: 3HM.F - news) 's benchmark emerging stocks index slipped 0.5 percent, led lower by some big losses in Asian markets that then spread to European trading.

Chinese mainland stocks fell 1.3 percent and Hong Kong shares 0.6 percent with index heavyweight Tencent (HKSE: 0700-OL.HK - news) down over 3 percent, after bank lending in China hit a record in November.

Although that may act as a short-term spur to economic activity, markets are wary it will encourage further monetary and regulatory action from Chinese authorities.

"The big question is what happens in China," said Jakob Christensen, head of emerging markets research at Danske Bank (LSE: 0NVC.L - news) , adding that the economy could lose momentum in coming months.

"The broad money supply ... still points to a fairly tight situation and financial tightening will have an impact on the economy."

China is likely to set its 2018 economic growth target at around 6.5 percent, unchanged from 2017, as a government deleveraging campaign is set to intensify, a policy adviser was quoted as saying.

Christensen said markets were also in wait-and-see mode ahead of the Fed meeting starting on Tuesday and Thursday's European Central Bank meeting.

"The (rate) hike by the Fed is priced in and shouldn't be a surprise, but the more interesting thing will be the signals about 2018," he said. "The Fed has to tread fairly cautiously until they see a sign that wage inflation is on a strong upward trend and we are not seeing that yet."

He added that some analysts were expecting four U.S. rate hikes next year, while the market was priced for around two.

The average yield spread of emerging market sovereign bonds over U.S. Treasuries on the JPMorgan EMBI Global Diversified index has flatlined at 288 basis points over the past week, after narrowing from a high of 302 bps in mid-November.

In Europe, Turkish banks tumbled 1.3 percent and the broader Turkish index fell 0.7 percent as the U.S. trial of a Turkish bank executive continued.

But the lira firmed 0.3 percent, still supported by blistering third quarter economic growth data and expectations of policy tightening on Thursday.

South African stocks fell 0.7 percent to the lowest since October, but retailer Steinhoff's shares rose 7 percent after tumbling 80 percent last week in the wake of an accounting scandal.

Steinhoff is considering selling stakes worth $1.4 billion in local companies PSG Group (Other OTC: PSSGF - news) and KAP Industrial to plug a liquidity gap.

Oil producers were supported by a 1.2 percent rise in Brent crude futures to over $65 a barrel after the North Sea Forties pipeline was completely shut for repairs.

Middle Eastern bourses broadly rose, while the rouble firmed 0.2 percent and ten-year Russian yields touched five-week lows before Friday's policy meeting that should yield a 25 bps rate cut. For GRAPHIC on emerging market FX performance 2017, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see http://tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley (Xetra: 885836 - news) Emrg Mkt Indx 1114.25 -5.72 -0.51 +29.22

Czech Rep 1056.80 -1.28 -0.12 +14.67

Poland 2388.41 +1.48 +0.06 +22.61

Hungary 37964.56 +388.81 +1.03 +18.63

Romania 7592.91 -21.60 -0.28 +7.17

Greece 739.60 +1.13 +0.15 +14.91

Russia 1148.04 +3.69 +0.32 -0.37

South Africa 51346.32 -364.90 -0.71 +16.96

Turkey 08472.84 -683.64 -0.63 +38.82

China 3281.01 -41.19 -1.24 +5.72

India 33212.48 -243.31 -0.73 +24.73

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 25.62 25.59 -0.09 +5.43

Poland 4.21 4.20 -0.20 +4.69

Hungary 314.08 314.58 +0.16 -1.67

Romania 4.63 4.63 -0.11 -2.16

Serbia 119.41 119.29 -0.10 +3.30

Russia 58.80 58.91 +0.19 +4.18

Kazakhstan 334.77 335.45 +0.20 -0.33

Ukraine 27.15 27.10 -0.18 -0.55

South Africa 13.58 13.60 +0.17 +1.14

Kenya 103.00 103.00 +0.00 -0.61

Israel 3.54 3.53 -0.18 +8.91

Turkey 3.82 3.84 +0.39 -7.70

China 6.62 6.62 -0.01 +4.91

India 64.45 64.35 -0.15 +5.43

Brazil 3.30 3.30 +0.00 -1.56

Mexico 19.04 19.05 +0.04 +8.77

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 314 0 .04 8 04.76 1

All data taken from Reuters at 09:34 GMT. Currency percent change calculated from the daily U.S. close at 2130 GMT.

(Reporting by Claire Milhench; graphic by Sujata Rao; editing by John Stonestreet)