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EMERGING MARKETS-Stocks, FX gain on hopes for a trade deal

Aaron Saldanha

* MSCI's EM stocks index hits three-month high, now up 0.5%

* U.S. Federal Reserve's rate decision due on Wednesday

* Yields on Argentina's overseas bonds rise after election

* Russian stocks gain, Surgutneftegas continues higher

Oct 28 (Reuters) - Emerging market stocks rose to a three-month high on Monday, aided by gains among Chinese shares, while developing-world currencies gained at the beginning of an important week for emerging-market assets.

Reports on Friday that the United States and China were close to completing some parts of a trade deal boosted sentiment on Monday, before Wednesday's U.S. Federal Reserve rate decision. The trade war is a key factor in the Fed's rate outlook.

MSCI's emerging-market equities index gained 0.5%, while Chinese stocks rose 0.9%, fuelled by hopes of tangible progress being made on the U.S.-China trade front.

The yuan recorded its best close in domestic onshore trade since Aug. 19, as MSCI's developing-world currencies benchmark rose 0.2%.

"The Federal Reserve's monetary policy currently is a function of U.S.-China trade tensions and how detrimental that is going to be to the U.S. economic slowdown ... the trade headlines are going to dictate everything," said Simon Harvey, FX market analyst at Monex Europe.

"(U.S. Fed Chair Jerome) Powell previously said you can't model monetary policy given the U.S.-China trade tensions. The market has fully priced in a rate cut, so all eyes will be on the forward guidance."

Russian stocks gained 0.4%, with Surgutneftegas rising about 1%. Shares of the pipeline operator have risen about a third in the week through Monday.

Turkey's lira rose 0.8% and Turkish stocks slipped dipped 0.1% in shortened trading hours before a local holiday on Tuesday.

South Africa's rand was up 0.5% after reaching a month-and-a-half high earlier in the session. The country's medium term budget a Moody's review of South Africa's credit rating are due this week.

Monex Europe's Harvey said foreign investors were beginning to hold South African bonds again, noting their relatively attractive yield and falling costs for credit default swaps.

The yield on Argentina's overseas-listed January 2028 benchmark dollar bond rose above 22% from about 21.64% on Friday, after pro-market President Mauricio Macri lost an election to left-leaning Alberto Fernandez.

"This is a bad result for investors since Fernandez will feel under more pressure to implement policies that boost growth and resist pressures for further adjustments," wrote Daniel Kerner, Eurasia Group's managing director for Latin America, in a note.

For GRAPHIC on emerging market FX performance 2019, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2019, see https://tmsnrt.rs/2OusNdX

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For RUSSIAN market report, see (Reporting by Aaron Saldanha in Bengaluru, editing by Larry King)