EMERGING MARKETS-Stocks hit two-month low on AI selloff; Romania gains on coalition hopes

By Johann M Cherian and Sudeshna Ghoshal

Oct 15 (Reuters) - MSCI's emerging market stocks index slid to a two-month low on Thursday, weighed by a selloff in Asian tech stocks, while Romanian assets bucked the trend as investors grew hopeful that the country could emerge from a months-long political crisis.

The EM benchmark .MSCIEF tumbled 3% to a July low, bogged down by sharp tech sector losses in Korea .KS11, Taiwan .TWII and Hong Kong .HSTECH. The won and the Taiwanese dollar were also down 0.1% and 0.6%, respectively.

Expectations of higher US interest rates drove losses after a hot inflation report in the previous session prompted investors to reconsider their appetite for AI stocks that have been increasingly reliant on debt financing.

The International Monetary Fund in Bangkok also echoed concerns about a potential correction in the AI boom against the backdrop of higher borrowing costs and fiscal vulnerabilities in Asia.

On the flip side, markets that have less exposure to AI were among the top gainers.

Indian equities .NSEI, .BSESN rose 2%, Turkish banks .XBANK gained about 0.8%, while stocks in South Africa .JTOPI and broader emerging Europe .MIME00000PUS were up 0.7% and 0.9%, respectively.

India's rupee and South Africa's rand edged up 0.2% and 0.3%, respectively.

"India's currency and equities have already underperformed substantially this year and South Africa provides a partial hedge to global inflation concerns with its gold exports," said Hasnain Malik, managing director, geopolitical risk and emerging markets equity strategy at Tellimer.

ROMANIA COALITION TAKES SHAPE

In some relief for Romania, Social Democrats said they will join the government of Prime Minister-designate Luca Niculescu, while other parties also pledged their votes. Niculescu is now expected to unveil his government later in the day before a parliamentary vote of confidence.

Romanian stocks .BETI gained 1.8% and outperformed the broader region, while hard-currency bonds maturing in 2053 gained 1.7 cents on the dollar. The leu firmed 0.5% to 4.75 per dollar.

While a new government might bring immediate relief, passing of the 2027 budget will be keenly watched, considering Romania narrowly avoided an investment-grade ratings downgrade earlier this month.

"With no political party of his own, Niculescu will be hostage to a shaky coalition of mutually suspicious parties, none of whom want to be held responsible for the fiscal austerity measures which are needed to tame a fiscal deficit of over 6% of GDP," Tellimer's Malik said.

EM hard-currency bonds across the board gained, tracking a rally in developed market debt. Maturities of Korea , Saudi Arabia , Poland and Hungary gained over 1 cent on the dollar.

UKRAINE BONDS SLIDE ON REFINERY STRIKES

However, Ukrainian bonds maturing in 2035 and 2036 fell over 1 cent on the dollar and hit a six-month low after the country resumed strikes on Russian refineries. Ukraine acted after President Volodymyr Zelenskiy voiced his anger at a "dangerous" withdrawal of US intelligence.

Since US President Donald Trump's surprise announcement of an energy ceasefire between Russia and Ukraine on Sunday, Kyiv had refrained from attacking Russian refineries. But Zelenskiy had voiced increasing frustration with Russia's continued attacks on Ukrainian energy infrastructure.

Elsewhere, Nepal and the World Bank signed a mandate agreement to explore the development of a catastrophe bond that could help the Himalayan nation access funding quickly in case of a major earthquake.