By Chris Vellacott
LONDON, July 7 Mon Jul 7, 2014 6:35am EDT
LONDON, July 7 (Reuters) - Emerging stocks traded at 13-month highs on Monday, extending the previous week's gains fuelled by global growth optimism, though fighting in Ukraine and air strikes in Israel weighed on the rouble and the shekel.
MSCI's emerging equity index rose 0.18 percent, surfing a wave of optimism fuelled by signs of economic resilience in the United States and China.
Stock markets in India hit their third consecutive record high ahead of this week's budget, which is expected to include a raft of crucial reforms, while Indonesian markets traded at four-week highs on optimism that July 9 elections would usher in a new, business-friendly government.
In emerging Europe, however, the mood was less buoyant.
The Russian rouble slipped 0.5 percent against the dollar as tensions rose in Ukraine, where government forces drove pro-Russian rebels out of their former stronghold Slaviansk.
"There have been some negative developments in eastern Ukraine as militants have now moved to Donetsk and this is not a positive as Donetsk is a big city. Markets are wary of a potential increase in the Russian response," said Tatiana Orlova, a strategist at RBS.
She pointed also to seasonal factors behind the rouble pressures, noting that Russian tourists travelling abroad during the summer months typically boost demand for foreign currency.
Russian equities though moved higher, with the dollar-denominated RTS index up 0.3 percent, while its rouble-traded peer MICEX added 0.5 points, both recovering from a small early dip. Russian CDS fell 8 basis points to 172 bps.
The cost of insuring Ukrainian debt against non-payment rose, with five-year credit default swaps (CDS) reaching 781 basis points, from 773 basis points, according to financial data provider Markit.
Politics also were impacting Israel, where Tel Aviv's blue chip share index dropped 0.7 percent in the wake of Israeli air strikes that Islamist group Hamas said had killed seven of its members on Monday.
Israeli CDS rose two basis points to 77 basis points, a one-month high, according to Markit, while the shekel pulled back 0.23 percent.
"There have been worrying political developments.. And the market may start thinking of the tail risk of another intifada," Orlova of RBS said.
Elsewhere in emerging Europe, shares in Hungary's biggest bank OTP dropped to 10-week lows after it issued a profit warning on the back of new laws on compensating customers for lending practices that a court ruled were unfair.
The Budapest stock market was at six-week lows and the forint fell 0.2 percent versus the euro.
Analysts at Commerzbank attributed the falls to the Hungarian government's "continuing hardline stance" towards the banking sector.
In Bulgaria, ratings agency Fitch held its view on Bulgaria at BBB-, taken as positive following a run on Bulgaria's First Investment Bank - with customers flocking to withdraw more than half a billion dollars.
Politicians were able to calm depositors by assuring them that their cash was safe and the European Commission gave Sofia the green light to provide state aid to its lenders.
An Aug. 8, 2014, dollar bond issued by troubled Corpbank has risen to trade around 93 cents in the dollar after the country's finance minister said bondholders would not be required to participate in the bank's rescue.
The bond had fallen to lows around 73 cents late last month.
Also on bonds, emerging borrowers are continuing to tap global capital markets to take advantage of strong demand from yield-hungry investors after more than $260 billion in issuance in the first six months of the year.
Nigeria's First City Monument Bank met prospective investors on Sunday while Bahrain is due to also make an appearance on markets.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Editing by Hugh Lawson)
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