Banks suffer as European shares tumble on Ukraine tensions

Mon Mar 3, 2014 6:22am EST

* Euro STOXX Volatility Index surges more than 20 pct

* FTSEurofirst 300 falls 2 pct, ESTOXX 50 off 2.5 pct

* FTSEurofirst set for worst daily fall since Jan 24.

* Some traders see Ukraine resolution in coming weeks

By Sudip Kar-Gupta

LONDON, March 3 (Reuters) - Escalating tensions in Ukraine hit European shares on Monday, with banks and other companies exposed to the region among the hardest-hit.

The pan-European FTSEurofirst 300 index, which rose 16 percent in 2013, was down 2 percent at 1,321.71 points by mid-session trading, while the euro zone's blue-chip Euro STOXX 50 index retreated 2.5 percent to 3,070.21 points.

The uncertainty over the situation in Ukraine, which is in conflict with Russia over Ukraine's Crimea region and the future political direction of Kiev, also caused the Euro STOXX Volatility Index to surge 27.6 percent to 21.39 points.

The rise in the Euro STOXX Volatility Index led it to challenge its 2014 peak of 24.60 points, while the FTSEurofirst was on track for its worst one-day fall since a 2.4 percent drop on Jan. 24 this year.

Banks took the most points off the FTSEurofirst 300, with lenders exposed to Ukraine and Russia falling sharply.

Austria's Raiffeisen slumped 9.1 percent, France's Societe Generale fell 6.4 percent while Italy's UniCredit dropped 4.1 percent.

Companies with significant exposure to Russia, such as carmaker Renault and brewer Carlsberg, also fell sharply with Renault sliding 5.1 percent and Carlsberg dropping 6 percent.

"Investors had underestimated the risks of an escalation in Ukraine, so the events over the weekend are a wake-up call for the market," said David Thebault, head of quantitative sales trading at Global Equities in Paris.

CRIMEA CONFLICT

Russian forces have taken control of Ukraine's Crimea region, which has an ethnic Russian majority. Ukraine has stepped up its own military preparations while the United States has threatened to isolate Russia economically.

"This could be a pretext for a 5 percent setback in the market," said Francois Savary, chief investment officer at Swiss bank Reyl.

However, Savary and other investors expected an eventual political resolution to the Ukraine problems within the coming weeks, which they said should help equity markets maintain their upwards trend seen over the last year.

The FTSEurofirst 300 index is still up by around 1 percent since the start of 2014, within sight of its highest level since May 2008.

Savary said that if the Euro STOXX 50 fell below the 3,000 level, it could represent a good entry point at which to buy into the index.

Toby Campbell-Gray, head of trading at Tavira Securities, also expected a political resolution soon to the problems in Ukraine and said equity markets would continue to be supported by the fact that they offer better returns than the bond and cash markets.

"We will see a mark-down for a few days, but people still want to buy this market - there's nowhere else to put your money," he said.

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