* Stocks down; Gulf markets mostly rise after declines
* Emerging FX gain from euro rise
* Russia favoured; rouble Eurobond pricing later this week
By Sujata Rao
LONDON, Feb 23 (Reuters) - Stock markets across the developing world fell for the third straight day on Wednesday as the turmoil in Libya kept a firm check on risk appetite, but emerging European currencies gained from an uptick in the euro.
With hundreds of people believed to have been killed in Libya and the unrest set to continue, oil prices junped to a new 2-1/2 year peak, fuelling fresh fears for inflation and more policy tightening in emerging economies.
That fear is weighing on stock markets globally, with emerging stocks down half a percent to a one-week low .MSCIEF while global equities were also feeling the pressure via companies exposed to Libya.
Yield spreads on emerging sovereign debt over U.S. Treasuries tightened slightly but were at the highest in nearly six months 11EMJ 11EML.
But expectations for higher euro zone interest rates buoyed the single currency, giving a boost to emerging Europe as well.
“There’s still a lot of risk in the emerging markets world in general,” said Imran Ahmad, EM strategist at RBS. “You still have Middle East risk ... and in emerging markets higher commodity prices lead to concern about inflation.”
He said the rise in the euro had helped emerging currencies, but over the medium-term, the inflation issue will keep markets attuned to the credibility of emerging central banks.
The zloty is likely to benefit. The Polish currency rose 0.4 percent against the euro EURPLN= though it stayed close to a six-week low, as investors weighed the chances of a rate rise in March.
Data showing a below-forecast rise in retail sales and recent dovish comments by central bank officials have prompted some investors to pare rate rise expectations.
But Ahmad said: “It’s been rewarded for the fact that (the central bank) decided to raise interest rates at the last meeting and is one of the central banks that is more proactive at tackling any inflation problems.”
In the Middle East, bonds and stocks recouped some recent losses, though the Bahrain 2014 issue BH043422812= remains just off one-year lows.
Saudi Arabia’s King Abdullah announced a series of citizens’ benefits worth billions of riyals, helping up the local stock market .TASI. There were some positive moves elsewhere in the region too as Dubai .DFMGI rose off six-month lows to post its largest gain in two weeks.
The Turkish lira also firmed against the dollar TRY= though it later pared gains and market players say any strength will be short-lived as Turkey’s economy is extremely vulnerable to the fallout from Middle Eastern unrest.
Turkey’s oil import bill is estimated at 5 percent of gross domestic product (GDP) and the latest oil price rise is bad news for the current account deficit, already at record highs.
The currency and local bonds have also been pressured recently by the central bank’s reliance on reserve requirements to tighten policy, while it has cut interest rates.
Turkish two-year local yields TR2YT=RR were at the highest since August 2010.
Unicredit analysts recommended buying protection on Turkey risk via five-year credit default swaps while selling CDS on Russia which benefits from the high oil prices. The gap is currently around 25 bps and could widen to 100 bps, they said.
Russian markets were closed for a holiday on Wednesday but the rouble firmed marginally to the dollar in offshore trade. On Tuesday it approached a two-week high against the euro-dollar basket RUS=MCX.
Unicredit also forecast the rouble would strengthen, noting this adds to the allure of the new rouble-denominated Eurobonds. Books on the issue opened on Tuesday and market players expect the deal to price on Friday tight to the local OFZ bond curve. Talk on the deal is at 7.875-8 percent.
“You could say that for a retail investor to be able to own Russian risk and get paid 300 bps more than what you would get on a 7-year (Russian) dollar bond, plus own an asset in a currency that many people seem to believe will continue to appreciate, is clearly appealing,” said James Croft, head of emerging fixed income at Mitsubishi UFJ.
But the downside is the lack of a premium to the local yield, while the rouble has already gained significantly since last autumn, he noted.
The general optimism over Russia did not extend to Ukraine where state-run Oschadny Bank postponed a planned 5-year bond.
“Ukraine has suffered some high beta contagion and the market is still long the recent sovereign issue,” Croft said, referring to Ukraine’s $1.5 billion 10-year bond sold last week.
The rand firmed 0.4 percent to the dollar ZAR= with markets waiting to see the government’s borrowing plans for the next fiscal year in the upcoming budget. (Additional reporting by Caroline Copley; editing by Stephen Nisbet)