EMERGING MARKETS-Stocks sputter ahead of Fed rate test, China blues linger

Traders expect the Fed to keep interest rates unchanged at 2 p.m. ET (1800 GMT), though a recent surge in oil prices to 10-month highs has stoked worries that the central bank could signal willingness to keep rates higher for longer in the face of sticky inflation. Stocks in mainland China and Hong Kong took a hit from uncertainty around the path of economic recovery in the world's second-largest economy.

Emerging market stocks fell on Wednesday as investors awaited a widely-expected "hawkish pause" from the U.S. Federal Reserve later in the day, with a jump in oil prices and concerns about China's economic recovery also weighing on risk sentiment.

MSCI's index for emerging market stocks was down 0.5% by 0842 GMT, falling for the third straight session and hitting a more than one-week low. Traders expect the Fed to keep interest rates unchanged at 2 p.m. ET (1800 GMT), though a recent surge in oil prices to 10-month highs has stoked worries that the central bank could signal willingness to keep rates higher for longer in the face of sticky inflation.

Stocks in mainland China and Hong Kong took a hit from uncertainty around the path of economic recovery in the world's second-largest economy. "The Fed is likely to reiterate that it will take time to bring inflation in line with the official target – especially if the labour market remains tight – and interest rates may have to stay higher for a prolonged period," said Piotr Matys, senior FX analyst at In Touch Capital Markets.

"Such prospects do not bode well for emerging markets at the time when China's economic activity is sluggish." China's blue-chip shares fell 0.4%, while the yuan held steady against the dollar as China kept benchmark lending rates unchanged at a monthly fixing.

Longer-dated sovereign dollar bonds in Armenia and Azerbaijan extended previous session's losses as Azerbaijan pounded Nagorno-Karabakh, a breakaway region controlled by ethnic Armenians, despite calls from Russia and the U.S. for both sides to halt a spiral into war. EM currencies were muted against the dollar.

The South African rand was flat against the greenback after data showed headline consumer inflation rose to 4.8% year-on-year in August. The reading came a day ahead of a monetary policy decision from the country's central bank. Most central and eastern European currencies gained versus the euro, with the Polish zloty up 0.3% after central bank governor Adam Glapiński said the scope for further reductions had narrowed significantly after this month's interest rate cut.

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