EMERGING MARKETS-LatAm assets extend slide as politics test rate-fueled optimism

By Niket Nishant

Dec 8 (Reuters) - Latin American currencies extended their slide on Monday as investors fretted over political uncertainty and looked ahead to central bank decisions, while Brazilian equities recovered from a sharp sell-off in the previous session.

MSCI's index of Latin American currencies .MILA00000CUS fell 0.7%, while the stocks gauge .MILA00000PUS dipped 0.4%. Brazil's Bovespa index .BVSP rose 0.6%.

Several Latin American stock markets were shut for a public holiday on Monday.

The region's markets are entering a critical stretch as rich valuations, looming rate cuts and the impact of local politics collide.

After months of gains fueled by the prospect of easier U.S. policy, the region's assets are vulnerable to political shocks that could test how much further investors are willing to chase the rally.

A LONG WAIT FOR NEXT OCTOBER'S ELECTION

Senator Flavio Bolsonaro, the eldest son of former President Jair Bolsonaro, said last week that he had his father's backing for next year's presidential elections.

The announcement knocked Brazilian stocks and the real BRL= lower as it dashed the hopes of some investors who had been betting that he would back a more market‑friendly figure with executive experience, such as Sao Paulo Governor Tarcisio de Freitas.

On Saturday, Flavio Bolsonaro reversed his stance, saying he may not run for president.

"There's a long way to go until next October's presidential election," said Chris Turner, global head of markets at ING.

"But the news serves as a reminder that local politics can always upend what is otherwise a very attractive carry trade play," he added, referring to the real's appeal. A carry trade involves borrowing in a low-interest-rate currency to invest in assets denominated in higher-yielding currencies.

RICHER VALUATIONS TO TEST APPETITE

Beyond the political uncertainty, investors are bracing for a busy week of interest rate decisions.

The Fed meets on Wednesday and is widely expected to cut rates, which could bolster demand for Latin American assets.

Brazil's central bank is also meeting this week, and is expected to keep rates on hold.

The strong run-up in Latin American equities in recent weeks may prompt some investors to pause.

"LatAm valuations are not at significant discounts anymore," analysts at BofA Securities wrote.

"We are constructive on Brazil, but acknowledge that uncertainty is high, as elections will likely be a decisive event next year. In Mexico, earnings growth and the easing cycle could provide support but less so compared to Brazil."

Mexican stocks .MXX were 0.1% lower and the local peso MXN= lost 0.3% against the dollar, on pace for its worst day in more than two weeks if current levels hold.

U.S. President Donald Trump discussed trade issues with the leaders of Mexico and Canada.

Key Latin American stock indexes and currencies: