EMERGING MARKETS-EM stocks drop as polarised Fed blurs rate outlook

By Nikhil Sharma

Nov 4 (Reuters) - Emerging Market stocks pulled back on Tuesday, while currencies also wavered as conflicting messages by U.S. Federal Reserve officials dimmed interest rate cut expectations, weighing on risk appetite.

MSCI's index for regional equities .MSCIEF fell 1.1% after rising 0.6% in the previous session, tracking weaker global sentiment after Fed officials on Monday offered competing views on the economy, muddying the policy outlook at a time when key data remains suspended amid a prolonged government shutdown.

After last week's cut, Fed Chair Jerome Powell signalled it was likely the final reduction of the year, clouding hopes for a December cut.

Markets are now pricing in a 67.2% chance of a rate cut in December, down from 94% a week earlier. 0#USDIRPR

A parallel index of EM currencies .MIEM00000CUS was down 0.13% - on pace for its fourth straight day of losses - against elevated levels for the U.S. dollar.

FORINT COULD WANE AFTER CARRY TRADE SUPPORT

The Hungarian forint EURHUF= led currency losses in Central-Eastern Europe, falling 0.8% after hitting a 17-month high in the previous session.

With the country's main interest rate standing at the European Union's joint-highest level of 6.50%, the currency has benefited from a wider interest-rate differential that continues to attract carry inflows, helping it outperform this year and lifting its year-to-date gains to 5.6%.

"We've seen strong performance by the Hungarian forint in last couple of months, mainly because of carry support... We do not expect it to stay that way towards the end of the year," said Barry van der Laan, senior FX market strategist at Monex, adding that the currency will lose against the euro despite the huge rate differential.

Budapest stocks .BUX fell 0.46%, retreating after hitting a record high on Monday. Equities have risen 35.16% YTD.

The Polish zloty EURPLN= was down 0.13% and the main stock index .WIG20 sank 1.3%. As the National Bank of Poland kicks off its two-day policy meeting on Tuesday, investors are largely backing a quarter-point rate cut on Wednesday following softer-than-expected October inflation data.

In the Czech Republic, investors expect the central bank to maintain a pause to its easing cycle on Thursday at 3.5% as it navigates wage pressures and the likelihood of looser fiscal policy, particularly after an election win for former Prime Minister Andrej Babis's populist ANO party.

NEW CZECH COALITION

On Monday, Babis' ANO party signed a coalition deal with fringe right-wing allies, moving closer to regaining power on promises of hiking spending, tax cuts, and opposing EU climate and migration policies.

"If you have parties on the very right or very left side of the spectrum, then you get into a situation where things become unsteerable. He (Babis) needs support from the right side, which is not really encouraging to Europe," Monex's van der Laan added.

The currency crown EURCZK= was down 0.18% and Prague equities .PX lost 0.54%.

Elsewhere in EM, Nigerian dollar bonds extended their decline, with 2050 maturity falling more than 1.1 cents to the dollar following President Donald Trump's surprise threat over the weekend to carry out strikes in the West African nation.

South Korean stocks .KS11 dropped 2.4% as investors rushed to book profits after a record-setting rally, driven by AI optimism.

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For CENTRAL EUROPE market report, see CEE/

For TURKISH market report, see .IS

For RUSSIAN market report, see RU/RUB