By Claire Milhench
LONDON, Sept 11 (Reuters) - A two-day rally on emerging equities faded on Friday as caution prevailed ahead of key Chinese data and next week's meeting of the U.S. Federal Reserve, though the key equity index was set for its best week since April.
MSCI's benchmark emerging market index were flat but remained on track to return over 2 percent for the week on the back of improved sentiment across global equity markets.
A weak performance from Chinese shares capped gains however, with mainland markets and Hong Kong both down 0.3 percent.
Christian Maggio, head of emerging markets strategy at TD Securities, said the market clearly had been unable to sustain the brief positive momentum.
"The market remains more bearish than bullish on emerging markets. And I don't see any sign that a rally or stabilisation in currency markets is durable at this point," Maggio said.
Emerging assets continue to witness an investor exodus with a BAML report estimating $4.5 billion in outflows from equities, their ninth straight week of losses
Investors are awaiting Chinese industrial, retail sales and investment data, due on Sunday, for indications on how fast growth is cooling the world's second largest economy. A U.S. Federal Reserve next week is also in focus to see if it delivers the first U.S. rate rise in almost a decade.
Offshore-traded yuan slipped 0.4 percent a day after suspected intervention in the offshore market by Chinese state banks to support the renminbi lifted it more than 1 percent, the offshore rate's largest daily gain on record..
Central banks across emerging markets have been intervening sporadically to smooth out volatility in their currencies, and investors are waiting to see if Malaysia's central bank announces any currency supportive measures to lift the ringgit off 17-year lows. The bank is expected to keep rates steady at 3.25 percent.
Russia is also expected to pause its rate-cutting cycle which has shaved 600 basis points off interest rates this year to 11 percent. The rouble slipped almost 1 percent to the dollar and has lost 30 percent since mid-May.
Russian stocks also fell 0.7 percent, weighed down by a fresh fall in oil prices to $47.50 a barrel.
"Rising inflationary risks due to sharp weakness of the rouble as well as general market volatility in the last few weeks will likely force the central bank to stay on hold for now," Bank of America/Merrill Lynch said in a note.
There are fears other emerging markets such as Turkey and South Africa will suffer the fate of Brazil whose rating was cut to junk by Standard and Poor's this week, fuelling a massive sell-off in its stocks, bonds and currency.