EMERGING MARKETS-Emerging stocks set for weekly loss on rising bond yields

By Karin Strohecker

LONDON, Feb 2 (Reuters) - Frazzled by rising U.S. Treasury yields, emerging stocks were on track for the first weekly loss since early December on Friday while currencies wobbled despite a frail dollar with South Africa's rand weakening 1 percent on political woes.

Losses in Asia weighed heavy on the benchmark, with South Korea seeing its stocks tumble 1.7 percent. MSCI (Frankfurt: 3HM.F - news) 's emerging market index fell 0.8 percent on the day and looked to end the week nearly 3 percent lower.

Equity markets around the globe have come under pressure in recent days after yields on 10-year U.S. Treasuries climbed steadily, trading at near four-year peaks, on flaring inflation expectations.

Meanwhile, JPMorgan (LSE: JPIU.L - news) 's EMBI Global Diversified index - indicating the average premium investors demanded to hold emerging market sovereign hard-currency debt over safe-haven U.S. Treasuries - had steadily narrowed over the week.

The index lost 4 basis points from a week ago, standing at 259 bps - its lowest level since summer 2014.

"You have got a bit of hope that the rise in U.S. yields is just a function of higher global inflation expectations, and if it is that, it's associated with stronger growth," said Koon Chow, strategist at UBP (Taiwan OTC: 6471.TWO - news) .

"If that is the situation, then it's mainly a problem of U.S. Treasury yields rather than any other markets."

Yet in a sign that more pressure could be ahead, Bank of America Merrill-Lynch's indicator of market sentiment hit a "sell" signal pointing to a downturn for risk assets.

Rising U.S. yields have failed to prop up the dollar index which hovered around a three-year trough. Emerging currencies struggled to make any gains as investors were awaiting key U.S. job's data due later in the day.

South Africa's rand chalked up the biggest losses on the day, slipping more than 1 percent.

Markets were cautious ahead of President Jacob Zuma meeting the top six officials of the ruling party over his future this weekend, adding to speculation he could be removed as head of state, although parliament said he would deliver the State of the Nation Address on Feb 8.

Turkey's lira nearly matched the losses, with investors once again wary over pressure on the central bank. On Thursday, President Tayyip Erdogan met Central Bank Governor Murat Cetinkaya and officials from state banks to discuss steps to reduce interest rates and encourage investment.

Russia's rouble and Mexico's peso also weakened, though all were on track for weekly gains.

China's yuan proved the exception, ending the domestic session at a new 2-1/2-year high against the dollar on Friday, and is set for the eighth straight weekly gain.

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

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