EMERGING MARKETS-EM stocks on track for weekly drop as global sentiment sours

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EM stocks drop 0.9%, FX down 0.1%

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Czech central bank holds rates steady

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Trump to meet Hungary's Orban to discuss Russian oil

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S&P to publish ratings review for Poland on Friday

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Sri Lanka unveils 2026 budget, says country to regain economic output

By Nikhil Sharma

Nov 7 (Reuters) - Emerging market stocks dropped on Friday, setting up a downbeat finish to a week largely dominated by global risk-averse sentiment and key interest rate calls from the region.

MSCI's index for Emerging Market equities fell 0.9%, taking its weekly losses to 1.4% so far - set for its worst week since late July.

The week's moves mirrored global market swings, led by technology stocks, amid renewed concerns of an AI bubble amid sky-high valuations. Divisions among Federal Reserve officials over the U.S. economy, along with warnings of potential equity downside, also pushed investors away from risky assets.

Meanwhile, a parallel index tracking EM currencies lost 0.1%, marking its sixth decline in the last seven trading sessions. For the week, the index was down 0.4%, with a firm U.S. dollar putting pressure on currencies elsewhere.

In Central-Eastern Europe, the Czech koruna struggled to find direction a day after the central bank extended its pause on interest rates as it flagged upside inflation risks from wage growth and potential government spending. The currency was flat week-to-date.

A key worry for policymakers is the incoming government, which has promised a looser fiscal policy that could give a short-term boost to growth, as well as inflation. The bank shied away from giving any signals about future moves.

Prague's main stock index added 0.2% to a record high. Data showed retail sales slowed in September, reflecting consumers' growing reluctance to spend amid an uncertain economic environment.

In Poland, the Polish zloty traded in tight ranges throughout the week, after its central bank delivered another modest rate cut and indicated that inflation will stay within the bank's target over the next two years.

Warsaw's benchmark index slipped 0.14% and was up 0.5% for the week. Market moves could be put to the test by a looming ratings action on Poland, echoing Fitch and Moody's moves last month.

Economists see S&P lowering its outlook on Polish debt to "negative" later in the day, citing concerns that the centrist government in Warsaw lacks a plan to rein in the growing debt.

"Poland's fiscal deficit situation is a lot worse than it was four or five years ago, but we know that most of this deficit is due to Poland's very high expenditure on defense," said Mohsin Memon, Emerging Europe and EM small-cap fund manager at Schroders.

"It is a very high deficit, but it is not something that is worrying us too much at the moment, because we know where it's being spent. Poland is spending 5% of GDP on defence in 2026, up from 2% in 2019."

The Hungarian forint fell 0.23% on Friday, but was up 0.45% for the week as it continued to benefit from its central bank's hawkish stance to keep the base rate at 6.5%, the joint-highest in the European Union.

However, a Reuters poll this week said the currency could drop 1% over the next six months, after rallying in October.

Budapest stocks were up 0.2% on the day. Investors were monitoring U.S. President Donald Trump's meeting with Hungarian Prime Minister Viktor Orban later in the day to discuss Hungary's reliance on Russian oil, as Washington pushes allies to cut purchases and squeeze Moscow's funding for the war in Ukraine.

Elsewhere, Sri Lankan President Anura Kumara Dissanayake presented the budget for 2026 and said the country had nearly completed its debt restructuring process and was set to regain the economic output it lost to the 2022 financial crisis.

The island nation's main stock index rose more than 1%.

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For RUSSIAN market report, see (Reporting by Nikhil Sharma; Editing by Kate Mayberry)