EMERGING MARKETS-EM stocks set for fourth weekly loss as central banks flag inflation concerns

* EM stocks down 0.8%, FX off 0.3%

* Pentagon weighs diverting Ukraine military aid to Middle East, report says

By Pranav Kashyap

March 27 (Reuters) - Most emerging market equities extended their decline for a second session on Friday and were headed for a fourth weekly loss, as central banks in the developing world sounded inflation warnings that prompted markets to price in a more hawkish policy outlook.

U.S. President Donald Trump said he would again extend the deadline for Iran to reopen the Strait of Hormuz or face the destruction of its energy plants, after Tehran had earlier rejected a 15-point U.S. proposal to end the fighting as unfair.

The four-week war has sent shockwaves through the global economy, driving energy prices sharply higher and reigniting fears of a fresh wave of worldwide inflation.

A broad index tracking emerging market equities fell 0.8% on the day and was on track for a near 2% weekly loss, marking its longest weekly losing streak since October 2024. A similar index tracking currencies fell 0.3%.

RATES DECISIONS

This week's rate decisions from the central banks of the Philippines, South Africa, Mexico and Sri Lanka all carried a common thread - growing concern over how much the surge in energy prices, fuelled by the U.S.-Israel war with Iran, could feed into inflation.

Markets were also tested by conflicting signals from Washington and Tehran, with both sides offering sharply different accounts of diplomatic progress, casting doubt on hopes for a swift de-escalation.

Israeli stocks slid to a two-week low, while the shekel weakened to its lowest level in more than two months against the dollar.

"Investors who choose to remain invested in markets should consider adding hedges for adverse geopolitical developments," analysts at Societe Generale said.

"If current supply shortages drag on for a few more weeks, crude oil could reach $150 per barrel and potentially trigger severe unintended consequences."

The South African rand, a currency especially sensitive to swings in risk sentiment, was set for a fourth week of losses - its longest losing run since April 2025. South African stocks, however, looked set to snap a three-week slide, supported by elevated gold prices.

Stocks across central and eastern Europe also came under pressure, with Polish equities leading the regional losses.

UKRAINE WAR IN FOCUS

Elsewhere, Ukraine's international dollar bonds fell nearly 1% after the Washington Post reported the Pentagon was considering redirecting weapons originally intended for Ukraine to the Middle East.

Russia, meanwhile, has asked oligarchs to contribute to the state budget, according to reports by The Bell online media outlet and the Financial Times, as Moscow seeks to shore up its finances while the war in Ukraine continues.

The Russian rouble, meanwhile, broke a five-week losing streak and was on course to gain about 2.5% for the week.

Across the emerging world, governments continued trying to shield consumers from the energy price spike while simultaneously revising growth forecasts and reassessing interest-rate trajectories.

Some cut taxes, others raised local fuel prices, and some turned to Russian oil to bypass the still-closed Strait of Hormuz. (Reporting by Pranav Kashyap in Bengaluru; Editing by Alison Williams)