By Carolyn Cohn
LONDON, Feb 3 (Reuters) - Weak Chinese manufacturing data pulled down emerging-market stocks again on Monday, after two weeks in the red, and the cost of insuring Hungarian debt rose on worries about the country's high debt and unorthodox policies.
China's official Purchasing Managers' Index (PMI) dipped in January, showing growth slowing in manufacturing as well as services.
With many Asian markets, including China, shut for the lunar new year holidays, trading volumes stayed thin. But the data is a concern for emerging markets that export to China. MSCI's main emerging equity index weakened 0.4 percent after January's 6.6 percent loss.
Gloom about the outlook for Chinese growth and the unwinding of U.S. monetary stimulus, which had fed demand for higher-yielding assets, have caused investors to flee emerging markets in recent weeks.
"The question is at which point the weakening process will fade and we see normalisation," said Luis Costa, emerging markets strategist at Citi. "We don't think we're there yet. The process of establishing real rates (interest rates minus inflation) in emerging markets is half-way through, and we may see further interest rate hikes."
India, South Africa and Turkey all raised interest rates last week to encourage investor flows, and markets are speculating Hungary may also need to hike.
The lira was little changed on Monday, however, after a report showed Turkish consumer prices rose sharply in January, driven higher by a surge in food prices.
The Hungarian January PMI rose to 57.9, far above the 52.4 average of the past three years, but the country's assets remained under pressure.
Hungary's five-year credit-default swaps rose to 5-month highs at 286 bps, according to Markit. Stocks fell 1.5 percent, although the forint steadied above the two-year lows it reached against the euro last week.
Hungary is considered one of the central European economies most exposed to contagion from the emerging-market sell-off, bcause of its high debt and an aggressive rate-cutting cycle that has taken interest rates to a record low 2.85 percent.
"Investors do not take a particularly favourable view of either the Hungarian political establishment or the Hungarian central bank, and they are determined to challenge their easing bias," said Gaurav Saroliya, central and eastern European strategist at Unicredit.
A Hungarian debt auction last week had to be cut short.
Polish stocks and the zloty rallied after data showing Polish manufacturing grew at the fastest pace in three years last month.
Russia's rouble steadied above recent five-year lows after PMI data showed Russian manufacturing shrinking for the third month in a row. South Africa's PMI also stayed below the 50 threshold that denotes expansion.
The Ukrainian hryvnia fell half a percent to fresh four-year lows as embattled President Viktor Yanukovich returned to work after four days of sick leave.
Ukrainian five-year credit-default swaps rose as high as 1,050 bps, according to Markit, their highest since mid-December, before Ukraine got a Russian bail-out. They eased to 1,042 bps by 1150 GMT.
In Asia, Thai stocks rose 1.5 percent after elections went ahead more peacefully than expected, but the baht gave up earlier gains as anti-government protesters ignored Sunday's vote and continued efforts to topple Prime Minister Yingluck Shinawatra.
Emerging-market sovereign debt spreads edged in after widening 50 bps over the last month. Kenya said it would press ahead with plans to market a debut Eurobond this month.
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