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Middle East uncertainty after Iran attack makes for tricky

trading

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S&P downgrades Israel's long-term ratings to 'A'

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Polish interest rate decision due

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FX down 0.1%, stocks up 1.3%

By Ankika Biswas

Oct 2 (Reuters) - Emerging market currencies were

largely muted on Wednesday as caution over escalating Middle

East violence kept investors on edge, while a rally in Hong Kong

shares pushed an emerging markets stocks index to an over

two-year high.

Israel is beefing up its presence in south Lebanon in its

conflict with Iran-backed Hezbollah, a day after being attacked

by Iran, raising fears the oil-producing Middle East could be

engulfed in a wider conflict.

Mohit Kumar, a Jefferies economist, suggested keeping a low

risk profile, saying "geopolitics is impossible to trade".

The MSCI index for EM currencies fell for

the second session, edging 0.1% lower on the day, with the

safe-haven dollar hovering around its over one-week high.

As the attack re-ignited the allure of safe-haven assets and

propped up oil prices, investors are treading tentatively

awaiting clarity on how the Middle East situation might unfold -

would it be an escalation, or more of a one-off backlash.

"Our base case is that the conflict stops short of an

all-out war between Israel and Iran, including their respective

allies," said Mark Haefele, chief investment officer, UBS Global

Wealth Management.

The Israeli shekel shekel was down another 0.2%,

after Tuesday's 1% fall, while the main stock index had

lost 1.2% in the prior session.

S&P Global downgraded Israel's long-term ratings to 'A' from

'A+', citing risks to economy and public finances, closely

following a two-notch downgrade of Moody's credit rating of the

nation.

Among other movers, Hungary's forint weakened 0.2%

against the euro and touched a near two-month low, while the

Polish zloty slipped to an almost three-week low ahead

of its local monetary policy decision.

Major Asian currencies were also weak, including the

Indonesian rupiah, which hit a multi-week low, and the

Thai baht.

Stock markets in the Gulf also fell on fears of a wider

regional conflict, led by an over 1% fall in Saudi Arabia's

benchmark index.

On the flip side, Hong Kong shares rose on continued cheer

around China's fresh stimulus measures and easier home purchase

rules, lifting the MSCI EM stocks index by over 1%.

The Hang Seng index hit its highest level since

January 2023, rising for the sixth straight day. Both China and

Indian markets were shut for public holidays.

HIGHLIGHTS:

** Kenya's economic growth slows in the second quarter of

2024

** Ethiopia expects 'tangible progress' on deal with

creditor nations by December

** Gradual interest rate cuts appropriate for Philippines,

says IMF