By Sujata Rao
LONDON Mon Nov 3, 2014 5:42am EST
LONDON Nov 3 (Reuters) - Emerging equities and currencies started the week on a sour note on Monday, hit by the dollar at four-year highs, lacklustre Chinese data and a possible fresh flare-up in tensions over Ukraine.
Russian stocks fell in a holiday-thinned trading session, while the rouble slipped another 0.8 percent versus the dollar as a controversial poll in Eastern Ukraine added to pressure from domestic factors.
MSCI's emerging equities index pulled back from five-week highs hit on Friday after the Bank of Japan's decision to embark on more money-printing, as purchasing managers' data from China showed services as well as the manufacturing sector had lost further momentum.
Mainland Chinese shares shrugged off the PMIs to touch the highest levels since February 2013, but Hong Kong markets slipped 0.3 percent.
Most Asian currencies were at multi-month lows versus the greenback which touched four-year highs versus a basket of major currencies, though the Korean won hit six-year highs against the rapidly weakening yen.
But the Turkish lira and South African rand slipped slightly against the dollar . The Polish zloty was flat near July 2012 lows but Hungary's forint dropped almost half percent to the greenback.
David Hauner, head of fixed income and economics for Emerging Europe, Middle East and Africa at Bank of America/Merrill Lynch said emerging currency depreciation was likely to be measured as U.S. yields have failed to rise sharply.
"You have an environment where the key trend is clearly for a stronger dollar," Hauner said.
"Data continues to suggest the first U.S. hike could only be after next summer. As long as this remains the case we will continue to see flows into EM debt. EM weakness against the dollar will be gradual and partly offset by strength against euro and yen," he added.
Emerging European shares mostly dropped, tracking Western bourses despite PMI data showing Polish manufacturing back in growth, Hungary picking up speed and Turkey expanding at the fastest rate in seven months.
But Russia's manufacturing sector fell to 50.3 from 50.4 in September, holding just above the 50 mark that separates expansion from contraction and the second monthly drop in a row.
Russia is shut for a two-day holiday but Moscow stocks were trading, with rouble-denominated stocks up a quarter point and dollar-denominated index down 0.7 percent.
The rouble also slipped after the central bank disappointed markets on Friday by raising interest rates by 150 basis points but deciding not to move to a free-floating exchange rate regime that would have allowed it to intervene at will.
Implied volatility on the rouble -- a gauge of expected swings in a currency -- rose to new record highs around 23 percent while rouble-dollar forwards priced in further depreciation over the next three and six months.
As companies' demand for dollars is primarily behind rouble weakness, many say rate hikes will not provide much support.
"It's a hard call to make (on) where the rouble can stabilise, it depends on how much dollar demand corporates ultimately want to satisfy," Hauner said.
Russian assets are also being pressured by an election in eastern Ukraine where pro-Moscow rebels voted for a separatist leadership. While the United States and European Union have denounced the election, Russia says it will recognise the result, deepening its rift with the West.
Ukraine's five-year credit default swaps (CDS) rose marginally to one-week highs of 1,188 basis points, according to Markit.
"The election may increase tension and jeopardise the shaky Minsk cease-fire agreement from September," analysts at SDEB said in a note.
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 Ruth Pitchford)
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