EMERGING MARKETS-LatAm assets resume slide as Middle East conflict presses on

By Twesha Dikshit and Purvi Agarwal

March 5 (Reuters) - LatAm assets pulled back on Thursday, as an escalating war in the Middle East and continued shutdown of the crucial Strait of Hormuz weighed on investor risk sentiment, while oil prices surged higher due to supply concerns.

The U.S.-Israeli war against Iran entered its sixth day and showed no signs of abating, with Azerbaijan warning it was preparing a response to two Iranian drones flying across its border.

Attacks on energy infrastructure continued, with nine vessels hit so far since the conflict began, disrupting shipping. Many gas and oil exporters in the region halted production, clouding the outlook for where prices were headed.

While the impact in emerging markets will differ, with analysts pointing to oil importers being more vulnerable to a prolonged escalation, concerns about global inflation remain, with positions in risky EM assets likely to be reduced first.

"One reason why sentiment was kind of positive yesterday is that a risk aversion globally is driven by oil prices... Oil prices were down a bit yesterday, so people took on more risk," said Arthur Budaghyan, chief EM/China strategist at BCA Research.

"Going forward investors should expect risk assets including in EMs and DMs to trade over oil prices."

The MSCI Latin American equity index .MILA00000PUS dropped 4% after recovering some of its losses in the previous session. A corresponding currency gauge .MILA00000CUS was down 1.6% against a stronger dollar.

EM REGIONAL MARKET IMPACT DIFFERS

Brazil's stocks .BVSP edged down 2.6% to their lowest level in a month. Official data showed the country's jobless rate rose to 5.4% in the three months through January. The real BRL= lost 1.1% against the greenback.

Central bank monetary policy director Nilton David said the organization would take a measured approach in assessing data with the Middle East conflict driving oil prices higher, potentially fuelling inflation.

Brazil's rate-setting committee, which will meet on March 17-18, had signaled the interest-rate-lowering cycle would begin in March, but developing geopolitical risks could alter those expectations.

"They will be hesitant because the real currency is going down now, and higher oil prices are going to kind of introduce inflationary pressures... as that happens, room for central bank to cut rates in the near term will be limited," said Budaghyan.

Benchmark indexes in copper exporter Peru .MXNUAMPESCPGPE and Chile .SPIPSA, reliant on oil imports, dropped 3.4% and 1.9%, respectively, while the Chilean peso CLP= weakened 2.1%.

Mexico's equities .MXX fell 2.6%, while its peso MXN= edged down 1.3%. The U.S. Trade Representative's office said that U.S. and Mexican negotiators will hold bilateral discussions, starting the week of March 16 as part of the joint review of the USMCA - an existing North American free trade agreement.

Colombia's equities .COLCAP were down only 0.3%, as a 9.2% rise in Ecopetrol ECO.CN, after the state oil producer said it plans to review its investment in April if oil prices continue to rise due to the conflict, limited losses.

Middle Eastern bourses were mostly higher, with exchanges in Dubai, UAE and Bahrain serving as outliers.

Asian markets recovered from the previous session's rout with Korea's blue-chip index .KS11 closing up 9.6%, after clocking the biggest one-day drop in its 46-year history.

Key Latin American stock indexes and currencies: