Ukraine tensions hit shares, euro drops to 2-week low

Written by Reuters | London | Updated: Feb 27 2014, 23:25pm hrs
Political and military tension in Ukraine and Russia curbed risk appetite on Thursday, weighing on world stocks and pushing the euro, already under pressure from interest rate cut talk, to a two-week low.

Sabre-rattling over Ukraine grew as Russia's Defence Ministry was quoted as saying fighter jets along its western borders have been put on alert, a day after it called a snap military exercise of 150,000 troops.

Ukraine said it would regard any movements by Russian military in Crimea outside the Russian Black Sea fleet's base in Sevastopol as an act of aggression.

Market moves were inevitably biggest closest to the events.

The Russian rouble hit a fresh five-year low against the dollar, while the Ukrainian hryvnia hit a record low as its central bank abandoned its managed exchange rate policy.

The rhetoric kept Europe's main stock markets pegged back in early trading. But it was the euro that appeared to be bearing the brunt of the uncertainty as it dropped 0.25 percent to a two-week low of $1.3641.

There was plenty of additional pressure. A downward revision to Spanish fourth-quarter GDP figures came alongside ECB data showing little improvement in the amount of credit reaching euro zone firms.

The first flurry of German inflation figures also suggested there would be scant pick-up in euro zone inflation when it is published on Friday.

The ECB meets next week and is under pressure to cut interest rates again and dip back into its unconventional policy cupboard to ensure the euro zone doesn't become mired in deflation.

"The key for today is the German inflation data because that is going to give the market a view of the euro zone number tomorrow," said Bank of Tokyo Mitsubishi FX strategist Derek Halpenny.


The backdrop of geopolitical uncertainty had seen investors in Asia head for the safety of the dollar and U.S. Treasuries, which both moved to two-week highs.

Europe's bond markets saw similar moves, though the inkling that more moves are coming from the ECB helped lower-rated Italian and Spanish debt keep up with traditional safe-haven favourite German Bunds.

Japanese stocks had skidded in Tokyo, with the Nikkei down 0.4 percent although MSCI's broadest index of Asia-Pacific shares outside Japan managed to eke out small gains on a rebound in Chinese shares.

After its recent falls the yuan saw a second day of relative calm, standing at 6.1300 per dollar, just off Wednesday's low of 6.1351.

Dealers suspect the People's Bank of China has engineered the recent decline in its currency to inject more two-way volatility into the market and wrong-foot speculators who had amassed huge positions wagering on its continued rise.

"It's possible that the Chinese authorities think they need a weaker yuan now to bolster the economy," said Hirokazu Yuihama, senior strategist at Daiwa Securities.


Early futures prices pointed to slender gains for Wall Street later after it failed to build on recent record highs on Wednesday.

The markets may also be cautious ahead of testimony from Federal Reserve Chair Janet Yellen, who is bound to face questions on the recent spate of soft U.S. economic news and what it might mean for policy.

If the view is that the recent icy weather is to blame, investors are likely to expect the Fed to keep trimming its bond-buying programme by $10 billion at each policy meeting and end it completely by the end of the year.

"Given U.S. debt yields fell and that U.S. shares were steady to softer, the dollar's strength should be regarded as a reflection of risk aversion rather than rising confidence in the U.S. economy," said Masafumi Yamamoto, chief strategist at Praevidentia Strategy.

Turkey, one of the countries hardest-hit by the recent emerging market volatility, saw its lira slipping to three-week lows, dented also by a corruption scandal embroiling Prime Minister Tayyip Erdogan's government.

Brazil's central bank raised its benchmark interest rate on Wednesday to 10.75 percent from 10.50 percent as expected.

Among commodities, copper dropped to a three-month low below $7,000 a tonne, extending its losses over the past week on concerns about slower growth in China.

Oil edged lower, while gold stepped back after hitting a four-month high on Wednesday as the dollar strengthened broadly. It last stood at $1,329.30 an ounce , off Wednesday's high of $1,345.35.

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