EMERGING MARKETS-LatAm assets set for subdued end to strong week, Mexico's peso rallies

By Niket Nishant

Dec 5 (Reuters) - Latin American stocks and currencies were subdued on Friday as investors assessed a U.S. inflation report, putting the region on track to end an otherwise strong week on a note of caution.

The Personal Consumption Expenditures index, seen as the Federal Reserve's preferred inflation gauge, is one of the final economic cues policymakers will scrutinize before their next meeting.

Rate cut expectations have powered much of the rally in emerging markets over the last few sessions.

MSCI's index of Latin American equities .MILA00000PUS fell 0.1%, set to snap a three-day winning streak, while the currencies gauge .MILA00000CUS dropped 0.6%.

The election in Honduras is also weighing on sentiment, while rising tensions between the U.S. and Venezuela loom in the background.

"In 2026, external conditions should remain broadly supportive, but domestic political cycles, fiscal challenges and uncertainty about geopolitical developments will likely slow inflows modestly," said Martin Castellano, head of LatAm Research at the Institute of International Finance.

Both the MSCI indexes were headed for weekly gains if current levels hold, and analysts said the backdrop is set up perfectly for the broader emerging markets universe despite near-term noise.

Fund flows underline the improved tone. Emerging market debt funds took in about $2.4 billion last week, up from $1.7 billion the week before, according to data from Morgan Stanley.

BRAZIL STOCKS SOFTEN, MEXICO PESO RALLIES

Brazil's Bovespa index .BVSP dipped 0.1% after coming close to the 165,000-point milestone, while the real BRL= weakened 0.7% against the dollar.

The central bank is expected to hold its key rate at 15% at the December 10 meeting, a Reuters poll of economists showed.

Argentine equities .MERV extended their rally, gaining nearly 1.6%. Its dollar-denominated bonds were also trading slightly higher.

The country unveiled the tender for a four-year dollar bond governed by local law as President Javier Milei's administration continues to test the waters for an eventual return to international capital markets.

The International Monetary Fund said on Thursday Argentina's monetary and foreign exchange policies will need to support a stronger accumulation of reserves to facilitate access to global markets.

In Mexico, stocks .MXX were flat while the local peso MXN= rose 0.3%, hitting its highest since July last year.

"Our core view for Mexico in 2026 is one of weak economic growth, relatively stable inflation, and therefore room for additional monetary easing," analysts at BofA Securities wrote in a note.

Colombian equities .COLCAP were little changed. The central bank may need to do more with monetary policy to moderate domestic demand growth, board member Bibiana Taboada said on Friday.

In October, the bank held its benchmark interest rate at 9.25%, in line with market expectations, as it weighed uncertainty over inflation.

Regional moves were also supported by gains in gold and copper prices, with copper hitting a record high. Both metals are among Latin America's key exports.

Peruvian equities .MXNUAMPESCPGPE were 1% higher.

Key Latin American stock indexes and currencies: