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EMERGING MARKETS-Brazil real gains on budget goal, Ukraine debt insurance costlier

costlier@

* Investors encouraged by Brazil's budget savings goal

* Chinese stocks fall after factory PMI hits 7-month low

* Ukrainian debt insurance costs highest since Dec 2009

NEW YORK/LONDON, Feb 20 (Reuters) - The Brazilian real gained 1 percent on Thursday after the country set a more modest and possibly more realistic fiscal savings target for 2014, while Ukraine's debt insurance costs rose to their highest since December 2009 on escalating conflict. Chinese equities dropped from two-month highs reached earlier on Thursday after a index of manufacturing activity shrank to a seven-month low. In Latin America, however, a fall in stock prices was cushioned by data showing U.S. manufacturing activity accelerated in February at its fastest pace in nearly four years. Worries about a slowdown in the Chinese economy have contributed to a sharp sell-off in emerging markets in recent months as investors eye the economic prospects of countries such as Brazil and Chile, which are big commodities exporters to China. "The story of China remains one of very sluggish growth," said Luis Costa, emerging markets strategist at Citi. "It does not bode well in an environment where emerging market FX is already trading nervously." In Brazil, however, the real gained as much as 1.05 percent as investors received with cautious optimism the announcement that the government of President Dilma Rousseff intends to deliver a primary fiscal surplus of 1.9 percent of gross domestic product this year. Brazil failed to achieve its budget savings targets of 3.1 percent of GDP in 2012 and of 2.3 percent of GDP in 2013, raising the threat of a sovereign rating downgrade from Standard & Poor's in the next few months. This year's target, albeit lower than in previous years, could be a positive step if the government sticks to it despite strong spending pressures stemming from Rousseff's re-election campaign. "Today's overall announcement was positive, in terms of the breakdown of cuts as well as projected revenues," Credit Suisse analysts wrote in a research note. "We believe the reestablishment of the confidence around fiscal policy management, however, still depends on a consistent flow of monthly results ahead." In Mexico, the peso edged 0.4 percent higher as investors were encouraged by the strong manufacturing data in the United States, Mexico's main trading partner.

UKRAINE TENSIONS RISING Ukraine's five-year credit default swaps rose 59 basis points to 1,384 bps, according to Markit, after at least 21 people were killed on Thursday in Kiev, shattering an overnight truce and bringing the death toll above 50. But Ukrainian dollar bonds steadied after sharp drops in the previous session on the violent conflict between President Viktor Yanukovich's government and anti-government protesters. Three European Union foreign ministers flew out of Kiev on Thursday without seeing Yanukovich, but three others were meeting the president, diplomats said.

Ukraine's June 2014 dollar bond gained 1.2 points to 94.1, according to Tradeweb, while the 2017 bond rose 1.6 points to 84.1, according to Reuters data. Traders said prices were marked down, rather than sold off heavily, in the previous session. Some bonds are also thought to still be in the hands of large U.S. investors like Franklin Templeton, which held large portions of several issues according to end-December filings. "I believe there has been some reshuffling but the biggest strategic positions are still there," said Costa. The hryvnia spot rate hit fresh five-year lows, and forward rates were implying a 17.5 percent depreciation in a year's time. Investors are watching the fallout from Ukraine to neighbouring economies such as Poland and Russia. The rouble approached the previous day's five-year lows against the dollar. "The rouble has been caught by the EM currency sell-off," said Joseph Dayan, London-based managing director for Russian broker BCS Financial Group. "Ukraine is another unfortunate factor weighing in." Most emerging European and African currencies were steady to softer, after falling in Wednesday as the Ukraine crisis seeped into other markets. The Nigerian naira hit a record low of 169 to the dollar before trading stopped after President Goodluck Jonathan suspended Central Bank Governor Lamido Sanusi, an increasingly outspoken critic of the government's record on tackling rampant corruption. Nigerian stocks fell 1.4 percent and are the worst-performing in the MSCI frontiers index this year, after stellar gains last year. Sanusi, who was due to end his term in June, had been presenting evidence to parliament which he said showed the state oil company had failed to remit around $20 billion that it owed to federal government coffers. Sanusi said he would challenge the decision. "We investors do not like abrupt moves," said Citi's Costa. "This is obviously negative news." Jonathan named managing director of Zenith Bank Godwin Emefiele as the next central bank governor, but he was not to start until June.

Key Latin American stock indexes and currencies at 1715 GMT

Stock indexes daily % YTD % Latest change change MSCI Emerging 950.53 -0.89 -4.35

Markets

MSCI LatAm 2932.62 0.25 -8.61 Brazil Bovespa 47406.27 0.54 -7.96 Mexico IPC 39775.67 -0.58 -6.91 Chile IPSA 3637 -0.12 -1.68 Chile IGPA 17964.08 -0.07 -1.44 Argentina MerVal 5992.66 0.6 11.16 Colombia IGBC 12479.19 -1.08 -4.53 Peru IGRA 15470.82 0.34 -1.80 Venezuela IBC 2759.98 0 0.86 Currencies daily % YTD % Latest change change Brazil real 2.3710 0.75 -0.60 Mexico peso 13.2827 0.39 -1.90 Chile peso 555.4 -0.54 -5.28 Colombia peso 2045.6 0.15 -5.55 Peru sol 2.808 0.00 -0.53 Argentina peso 7.8125 -0.38 -16.90 Argentina peso 11.85 -0.42 -15.61

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