EMERGING MARKETS-EM assets headed for weekly decline; Ukraine bonds climb

By Niket Nishant

Dec 19 (Reuters) - Emerging market assets were on track for weekly losses after heightened geopolitical tensions and a slate of central bank decisions tempered optimism, despite tame inflation data in the United States.

The MSCI index of emerging market stocks .MSCIEF climbed 0.5% on Friday, but was poised to end the week 1.8% lower. The currency gauge .MIEM00000CUS was set to log a 0.2% decline.

The moves reflect a complicated global landscape where policy trajectories are diverging. While the market is priced for additional interest rate cuts by the Federal Reserve next year, other central banks are signalling a hawkish resolve, setting the tone for local markets accordingly.

Adding to the mix is a flurry of political developments, especially as attempts to negotiate an end to Russia's war in Ukraine pick up pace.

Some of Ukraine's dollar-denominated bonds were up more than 1 cent on the dollar, according to Tradeweb data, after European Union leaders decided to loan 90 billion euros ($105 billion) to the country.

LOCAL CENTRAL BANKS STEER SENTIMENT

"Heading into next week, markets face a delicate setup. Central bank divergence is now clearer. This is likely to inject more volatility into currency and rates markets, especially as investors reassess the timeline and depth of Fed cuts in 2026," said Daniela Hathorn, senior market analyst at Capital.com.

On Thursday, National Bank of Hungary Deputy Governor Zoltan Kurali said that the volatility in the forint EURHUF= was not something to be concerned about, days after policymakers kept interest rates unchanged but opened the door to potential reductions next year.

The Budapest index .BUX, Hungary's stock benchmark, was set to end the week 0.2% lower if current levels hold through the session. The forint EURHUF= weakened 0.7% against the euro during the week.

The Czech crown EURCZK= fell 0.2% on Friday, a day after the Czech National Bank left interest rates unchanged and said tight policy was still needed with inflationary risks remaining.

In China, the Shanghai Composite index .SSEC rose 0.4% for its third straight day of gains. The real estate index .CSI000952, which has come under pressure in recent days, moved 2% higher.

The Indian rupee INR=IN strengthened slightly, extending a recovery spurred largely by the Reserve Bank of India's intervention.

US-VENEZUELA OVERHANG

Later in the session, Latin American markets may face another stretch of political volatility. Tensions between the U.S. and Venezuela are looming over the region, with any escalation likely to ripple through oil markets.

Brazil and Mexico, two regional heavyweights, could also find themselves in the crossfire after calling for de-escalation, a stance that may stoke Washington's ire.

Domestic politics in Brazil are also under scrutiny as President Luiz Inacio Lula da Silva said he will veto a bill passed by the country's Congress to cut former President Jair Bolsonaro's 27-year prison sentence for plotting a coup.

Meanwhile, Colombian assets could be sensitive to the central bank's rate call, due on Friday.

LONG-TERM PROSPECTS BRIGHT

Despite the headwinds, 2026 prospects for emerging markets remain bright, especially compared to the past.

Uncertain U.S. policy shifts have made emerging market assets look relatively more stable, and tough fiscal steps have begun to pay off.

"Emerging market resilience proved more domestically anchored than expected," economists at the Institute of International Finance wrote in a note.