EMERGING MARKETS-South Africa, Turkey lead emerging market falls

By Sujata Rao

LONDON, Aug 24 (Reuters) - Emerging markets retreated on Wednesday, led by political risk-driven losses in South Africa and Turkey while broader sentiment was dented by a revival of U.S (Other OTC: UBGXF - news) . rate rise expectations.

Fears are growing for South Africa's economy and its credit rating after Finance Minister Pravin Gordhan, popular with investors and business, was ordered to report to police in relation to an investigation into a surveillance unit in the tax service.

The rand, which tumbled 3 percent on Tuesday after the news broke, fell another 0.7 percent to three-week lows, and benchmark bond yields rose above 9 percent for the first time since end-June.

Dollar bonds fell across the curve, losing as much as 2 cents, while debt insurance costs surged.

Analysts read the developments as part of a tussle between Gordhan and President Jacob Zuma's supporters. Zuma was forced to appoint Gordhan last December after the president's sudden removal of then finance minister Nhlanhla Nene caused a huge rand sell-off.

Citi analysts advised trimming rand and local bond exposure, noting the increase in foreign positioning in recent months.

"It is now clear that the political risks that came to light with the removal of FinMin Nene... have not gone away," Citi told clients.

"Market deterioration could be severe in the short term... South African CDS could reprice higher by more than 50-70 basis points in the short-term."

The fears rippled wider, with shares in London-listed South Africa-focused companies including Investec (LSE: INVP.L - news) , Old Mutual (Other OTC: ODMTY - news) and Mediclinic slumping 2-3 percent MMDCM.L>.

Citi suggested buying the lira versus the rand but it too weakened after Turkish forces launched attacks in Syria against Islamic State militants along the countries' border. Military sources said Turkish tanks crossed into Syria backed by warplanes from the U.S.-led coalition.

Turkish shares fell 2 percent and bond yields rose. Dollar bonds fell around half a cent.

The wider currency backdrop was also uneasy, with strong U.S. data and expectations of a hawkish message from U.S. Federal Reserve head Janet Yellen at this week's Jackson Hole central bankers' gathering boosting the dollar.

Investors view a U.S. rate rise as likely by December following hawkish recent comments by the Fed's No. 2 policymaker.

The dollar's gains hit most emerging assets, with MSCI (Frankfurt: 3HM.F - news) 's equity index down 1 percent to two-week lows and most currencies lower.

In eastern Europe, shares in Poland's no.1 insurer PZU - reportedly angling to buy a stake in Bank Pekao - tumbled to record lows after it posted a 56 percent drop in second quarter profits.

Poland began marketing an onshore yuan bond, making it the second country after South Korea to tap the "panda" bond market .

For GRAPHIC on emerging market FX performance 2016, see http://link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2016, see http://link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2016, see http://link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2016, see http://link.reuters.com/zyh97s

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 898.59 -7.91 -0.87 +13.15

Czech Rep 858.55 +7.83 +0.92 -10.22

Poland 1790.67 +0.07 +0.01 -3.68

Hungary 27822.49 +98.81 +0.36 +16.31

Romania 6906.30 +10.75 +0.16 -1.40

Greece 562.95 -4.95 -0.87 -10.83

Russia 962.72 -9.53 -0.98 +27.17

South Africa 46650.92 +511.59 +1.11 +1.86

Turkey 75951.78 -1381.83 -1.79 +5.89

China 3085.82 -3.88 -0.13 -12.81

India 27976.75 -13.46 -0.05 +7.12

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2016

Czech Rep 27.01 27.01 -0.01 -0.06

Poland 4.31 4.31 -0.04 -1.22

Hungary 309.61 309.79 +0.06 +1.62

Romania 4.46 4.46 -0.09 +1.32

Serbia 123.27 123.26 -0.01 -1.46

Russia 64.81 64.65 -0.23 +12.57

Kazakhstan 339.57 339.20 -0.11 +0.27

Ukraine 25.33 25.33 -0.00 -5.44

South Africa 14.03 14.00 -0.25 +10.20

Kenya 101.25 101.30 +0.05 +0.94

Israel 3.77 3.77 -0.03 +3.11

Turkey 2.95 2.95 -0.15 -1.23

China 6.65 6.64 -0.18 -2.37

India 67.10 67.11 +0.02 -1.34

Brazil 3.23 3.23 -0.07 +22.39

Mexico 18.49 18.57 +0.43 -7.12

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 360 1 .03 7 70.32 1

All data taken from Reuters at 08:55 GMT.

Currency percent change calculated from the daily U.S.

close at 2130 GMT.

(editing by John Stonestreet)