Ukraine tensions knock back European equities

Thu Feb 27, 2014 5:14am EST

* Traders cite concerns over escalating Ukraine tension

* Euro STOXX Volatility Index rises by around 10 pct

* FTSEurofirst 300 down 0.9 pct

* Euro STOXX 50 falls 1.1 pct

* February equity market rally starting to stall

By Sudip Kar-Gupta

LONDON, Feb 27 (Reuters) - Escalating political tension in Ukraine pushed European stock markets lower on Thursday, putting a brake on this month's rally and causing market volatility to rise.

The pan-European FTSEurofirst 300 index, which rebounded in February to approach its highest level since May 2008, fell 0.9 percent to 1,336.77 points in early session trading, adding to a 0.2 percent dip on Wednesday caused by a fall in luxury goods and financial stocks.

The problems in Ukraine have highlighted a broader slump in emerging markets economies this year, which impacted equity markets in January and have hit the earnings of companies - such as luxury goods groups - exposed to those regions.

The euro zone's blue-chip Euro STOXX 50 index fell 1.1 percent while Germany's DAX, which hit a record high of 9,794.05 points in late January, also weakened by 1.3 percent.

Concerns over the situation in Ukraine caused the Euro STOXX Volatility index to rise 10.5 percent to 17.80 points - marking its biggest one-day gain in a month.

On Thursday, armed men seized the regional government headquarters and parliament on Ukraine's Crimea peninsula.

The development came a day after Russian President Vladimir Putin ordered armed forces drills to test combat readiness in western Russia near the border with Ukraine, prompting a U.S. warning that a military intervention would be a "grave mistake".

Michel Juvet, chief investment officer at Swiss bank Bordier, said there could be longer term opportunities for investors regarding Ukraine.

"If the market has another correction, it would be another reason to buy equities," he said.

EQUITIES STILL PREFERRED ASSET CLASS

The FTSEurofirst 300 index remains up by nearly 2 percent since the start of 2014, adding to a 16 percent rise last year, and equities are still the preferred asset class for many investors.

Record low interest rates set by major world central banks, designed to boost the global economy after the 2008 financial crisis, have hit returns on cash and bonds and driven many investors over to the better gains available from equities.

The European stock market has also been propped up by robust results from some of the region's leading companies, with retailer Ahold and British American Tobacco both rising after posting higher earnings on Thursday.

According to data from Thomson Reuters StarMine, 58 percent of companies on the pan-European STOXX 600 index have so far beaten or met market expectations with their fourth-quarter results.

However, Darren Courtney-Cook - head of trading at Central Markets Investment Management - expected more near-term pressure on equities if the DAX remained below the 9,700 point level.

"If the DAX holds below 9,700, we could be in for further downside," he said.

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