EMERGING MARKETS-Fed bets fuel EM stocks run-up; Poland rattled by war spillover

By Pranav Kashyap and Twesha Dikshit

Sept 10 (Reuters) - A gauge tracking emerging market equities rose on Wednesday, with a Federal Reserve interest rate cut all but sealed for this month, while Polish assets came under pressure as Russia's war in Ukraine spilled into its territory.

The zloty EURPLN= weakened 0.4% against the euro, underperforming regional peers, while Warsaw's stocks fell 2%.

Poland said it had shot down Russian drones that entered its airspace during an attack on western Ukraine — the first time a NATO member has engaged militarily in the conflict.

Since Russia's invasion of Ukraine in 2022, drones have periodically strayed into NATO territory, including Romania and Poland, but had not previously been intercepted.

Ukraine's international bonds edged lower, while the Russian rouble RUB= weakened to a more than five-month low.

"We're going to see more incidents like this partly because it's war. Poland has a very strong lobby and the economy speaks for itself and continues to do well and it's politically in a good place, So it's in a very strong position," said Jonathan Young, CEO of CEEMENA-focused investment firm Gryphon Holdings.

"You're obviously going to get this kind of short-term reaction to what happened overnight but I wouldn't be reading too much into it."

Meanwhile, an Israeli airstrike on Qatar that targeted Hamas leaders rocked markets in the Middle East. Stocks in Doha .QSI fell 0.4%, while Saudi Arabia's .TASI and Dubai's .DFMGI indexes slipped more than 0.2% each.

Tel Aviv stocks .TA125, however, bucked the trend, hitting a record high for a second straight session.

Emerging markets shook off a week of political churn in countries including Turkey, Argentina, Thailand, Indonesia and Nepal, as a looming Federal Reserve rate cut kept risk appetite alive. The MSCI EM equity gauge was on track for a second straight weekly gain, with CME's FedWatch tool showing a 25 bp cut fully priced and odds of 50 bp creeping higher.

"A lot of EM countries don't have deep stock markets, but they have big economies. If the Fed cuts and the dollar is weak, there will then spillover effects into these stock markets, but the longer-term view is what's the economy looking like," Young added.

Hungary's central bank was due to publish August minutes on Wednesday after holding rates steady for an 11th straight month, with headline inflation still above its 2%–4% target band. The high carry has kept the forint in favour, powering one of central and eastern Europe's strongest year-to-date gains.

In Asia, Chinese stocks .CSI300, .SSEC, .HSI were in the green, tracking broader Asian markets, after data showed the country's producer deflation eased in August as Beijing stepped up efforts to curb price competition, while consumer prices fell at their fastest rate in six months.

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