July 31 (Reuters) - Argentina's longer-term debt insurance costs fell while shorter-term costs rose on Thursday, suggesting investors expect a deal in the medium term after the country defaulted for the second time in 12 years.
Broader emerging stocks dropped after the U.S. Federal Reserve sounded more hawkish on interest rates.
After a long legal battle with hedge funds that rejected Argentina's debt restructuring following its 2002 default, Latin America's third-biggest economy failed to strike a deal in time to meet a midnight deadline for a coupon payment on exchange bonds.
This sent Argentina into default, but investors thought the country could still strike a deal.
"It's probably going to be more of a soft default scenario where prices will slide a bit. There is confidence in what the government is going to do," said Rune Hejarskov, senior portfolio manager at Jyske Invest, which holds Argentinian bonds.
Argentina's 5-year credit default swaps (CDS) fell more than 400 basis points to 1,444 bps, according to Markit. Its 1-year CDS, however, rose 21 bps from Wednesday's close to 4,708 bps, indicating markets are betting on a higher probability of short-term default.
Argentina's bonds were not being actively traded in London trading hours, market participants said, adding there was little contagion to other emerging markets.
The MSCI emerging stocks index fell 0.7 percent to a nine-day low after the Federal Reserve's policy meeting.
U.S. investors tend to sell high-yielding emerging market assets when they expect interest rates to rise at home.
China shares , however, finished their best month since 2012.
Reacting to the Fed statement and forecast-beating GDP data from the United States, the South African rand fell to a 1-1/2 week low before trade numbers at 1200 GMT.
Russian stocks and the rouble rose after the European Commission published a new list of those subject to sanctions over Ukraine that spared major listed companies.
Moscow's dollar-denominated RTS index was up 0.65 percent, and its rouble-traded MICEX rose half a percent, after steep losses before the sanction details were announced.
The Czech crown firmed a shade to 27.542 against the euro before the central bank's policy meeting later on Thursday.
The central bank said on Tuesday it would move its cap on the crown exchange rate to a weaker level only if it saw a significant increase in deflation risks, reiterating its earlier position after trade unions opposed any further currency weakening.
Turkish stocks fell and the lira dipped as markets reopened after a three-day holiday.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Additional reporting by Andrew Winterbottom; Editing by Ruth Pitchford)