European equities slide as Ukraine tensions worsen

Thu Feb 27, 2014 6:06am EST

* Traders cite concerns over escalating Ukraine tension

* Euro STOXX Volatility Index rises by more than 10 pct

* FTSEurofirst 300 down 1 pct

* Euro STOXX 50 falls 1.3 pct

* February equity market rally starting to stall

* Allianz falls on asset management weakness

By Sudip Kar-Gupta

LONDON, Feb 27 (Reuters) - Poor corporate news combined with escalating political tension in Ukraine on Thursday to knocked back European stock markets, 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 1 percent to 1,335.02 points in mid-session trading, adding to a 0.2 percent dip on Wednesday caused by a drop in luxury goods and financial stocks.

Financial stocks took the most points off the FTSEurofirst 300 on Thursday as well, as Royal Bank of Scotland slumped 8 percent after posting a loss while insurer Allianz fell on the back of difficulties at its Pimco unit.

"We're getting to the tail-end of results season, and many of the results have not been that great. It's also early days in Ukraine, but the situation over there is making people nervous," said Andrea Williams, European equities fund manager at Royal London Asset Management.

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.

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".

The euro zone's blue-chip Euro STOXX 50 index fell 1.3 percent while Germany's DAX, which hit a record high of 9,794.05 points in late January, also weakened by 1.5 percent to 9,525.04 points.

Concerns over the situation in Ukraine caused the Euro STOXX Volatility index to rise 11.1 percent to 17.93 points - marking its biggest one-day gain in a month.

EQUITIES STILL PREFERRED ASSET CLASS

Yet in spite of Thursday's rise, the Euro STOXX Volatility index is still below a 2014 peak of around 24.60 points, and Michel Juvet - chief investment officer at Swiss bank Bordier - expected an eventual resolution to the problems in Ukraine.

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

The FTSEurofirst 300 remains up by 1.5 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.

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.