By Sujata Rao
LONDON, Sept 3 (Reuters) - Russian and Ukrainian bonds rallied on Wednesday, and Moscow-listed shares leapt 4 percent after Kiev said a "permanent ceasefire" had been agreed in the Donbass area, the news also sparking gains across emerging assets.
The Kremlin watered down the talk of a formal ceasefire, but it confirmed that steps for peace had been discussed.
Emerging stocks rose more than 1 percent surpassing three-year highs hit last month, after the ceasefire reports as well as Chinese data that showed a rebound in services activity. The data pushed Chinese domestic stocks to their highest since December 2013.
The biggest gains came in emerging Europe, the region most exposed to the conflict in Ukraine, after Ukraine's President Petro Poroshenko said in a statement that he had reached a deal with Russia's Vladimir Putin following a telephone conversation.
Pro-Russian separatists have been battling Kiev's forces in the mainly Russian-speaking Donbass region, which contains most of Ukraine's heavy industry and provides almost a fifth of the country's economic output. The prolonged conflict had led to fears that the country would be forced to restructure debt.
Russian debt prices had also weakened as the European Union had mooted banning investors from buying new sovereign debt if Moscow failed to end its involvement in eastern Ukraine.
RBS strategist Tatiana Orlova said the ceasefire reports were "very positive news for the market and unexpected too, because in the past 10 days, the geo-political crisis seemed to have deepened."
"The devil is in the detail but if a ceasefire holds that is a very serious positive for securities everywhere, especially in places such as Poland," Orlova added.
Ukraine's dollar bonds rallied even more, jumping around 2-3 cents on the dollar
The country's hryvnia currency was flat after central bank liquidity tightening measures pushed it to one-month highs of around 12.5 per dollar on Tuesday but forwards price it to weaken back to around 14 in six months time
Russian sovereign dollar bonds rallied 1.5-2.0 cents across the curve while credit default swaps (CDS) fell 30 basis points, according to data from Markit. Dollar bonds from state-run oil firm Rosneft jumped 1.8 cents. .
Russia has also cancelled debt auctions six weeks running but Orlova said a bigger concern was that state-run companies - including Rosneft - would be reliant on state help to repay debt if barred from Western capital markets.
"Six weeks (out of rouble bond markets) is not a big problem for Russia's finance ministry but it all depends on developments in the oil market where prices have been dropping," Orlova said.