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EMERGING MARKETS-Emerging stocks dip as investors eye more hawkish Fed

LONDON, Feb 1 (Reuters) - Encouraging factory growth data from markets such as Turkey and China failed to lift emerging equities on Thursday as a more hawkish Federal Reserve fuelled an uptick in U.S. Treasury yields, dampening investor appetite.

MSCI's benchmark emerging stocks index fell 0.2 percent , as a strong performance in emerging Europe failed to offset earlier weakness in the Asian session.

The Fed upgraded its inflation outlook and flagged further policy tightening this year at its meeting ending on Wednesday, citing solid gains in employment, household spending and capital investment.

U.S. 10-year Treasury yields briefly shot up to 2.754 percent, a level last seen in April 2014, casting a pall over emerging markets and dispelling some of the rosy picture from manufacturing activity data.

U.S. interest rate futures are now almost fully pricing in three rate hikes this year, compared to two at the start of the year, while some see a possibility of four rate rises.

"Now that Fed is signalling faster hikes we could have temporary dollar strength and EM weakness, but the fundamentals are the same," said Per Hammarlund, chief emerging markets strategist at SEB. "This is just a temporary correction, rather than a fundamental shift in sentiment."

Foreign investors poured $30 billion into emerging markets in January, a seven-month high and the best start to a year since 2015, according to Institute of International Finance data.

In emerging Europe, Turkish stocks rose 1 percent after Turkey's factory activity grew at the fastest rate in almost seven years in January.

Other big gainers included Russia, up 0.9 percent after manufacturing activity hit a six-month high, and Poland up 0.7 percent, as new factory orders expanded at their fastest in three years.

Asian bourses struggled, with Chinese mainland shares down almost 1 percent. Yet China's manufacturing growth remained elevated in January, suggesting some resilience.

"The world economy and China in particular have started the year on a relatively firm footing and that's good news for emerging stocks and assets," said Hammarlund.

In India, stocks initially fell more than 1 percent after the announcement of a long-term capital gains tax on equities. The market later steadied to trade flat.

The government also unveiled a budget allocating billions of dollars for rural infrastructure and a health insurance programme. The rupee weakened about 0.35 percent.

South Africa's rand was the other main currency underperformer, down 0.2 percent. President Jacob Zuma has asked prosecutors to drop corruption charges, responding as pressure mounts for him to step down.

The Czech crown was steady against the euro ahead of a central bank meeting today at which it is expected to raise rates by 25 basis points to 0.75 percent. Czech manufacturing sentiment held at a seven-year high in January.

"All the signs are that the economy is red hot, the labour market is booming, wage growth is picking up strongly ... so even though inflation hasn't picked up as much, the central bank is correct in expecting that there will be a pick up at some point," said Hammarlund.

For GRAPHIC on emerging market FX performance 2017, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see http://tmsnrt.rs/2dZbdP5

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Emerging Markets Prices from Reuters

Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley

Emrg Mkt Indx 1251.82 -2.77 -0.22 +8.06 Czech Rep 1138.53 +7.62 +0.67 +5.60 Poland 2571.72 +17.91 +0.70 +4.49 Hungary 40345.48 +156.97 +0.39 +2.46 Romania 8392.87 +22.41 +0.27 +8.24 Greece 890.68 +11.85 +1.35 +11.01 Russia 1294.92 +12.56 +0.98 +12.17 South Africa 52877.66 +263.01 +0.50 +0.66 Turkey 20629.81 +1101.02 +0.92 +4.59 China 3446.24 -34.59 -0.99 +4.21 India 35927.84 -37.18 -0.10 +5.49 Currencies Latest Prev Local Local close currency currency

% change % change

in 2018

Czech Rep 25.27 25.27 +0.00 +1.03

Poland 4.15 4.15 +0.07 +0.67

Hungary 309.86 309.87 +0.00 +0.22

Romania 4.65 4.65 -0.01 +0.61

Serbia 118.67 118.74 +0.06 -0.23

Russia 56.17 56.19 +0.04 +2.65

Kazakhstan 322.36 323.11 +0.23 +3.24

Ukraine 27.84 27.77 -0.25 +1.10

South Africa 11.88 11.86 -0.21 +4.00

Kenya 101.80 102.00 +0.20 +1.28

Israel 3.42 3.42 +0.05 +1.79

Turkey 3.75 3.75 -0.02 +0.91

China 6.29 6.28 -0.13 +3.40

India 63.74 63.54 -0.32 +0.14

Brazil 3.19 3.19 +0.00 +3.96

Mexico 18.59 18.59 -0.01 +5.67

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 289 -1 .05 8 06.74 1

(Reporting by Claire Milhench, graphic by Karin Strohecker; Editing by Keith Weir)