GLOBAL MARKETS-New sanctions hit Russian assets, spook world shares

Thu Jul 17, 2014 8:20am EDT

* Russia assets fall as U.S., EU impose more sanctions
    * European shares sag after strongest day in three months
    * Safe-haven assets get lift; yen, gold, bunds all higher

    By Marc Jones
    LONDON, July 17 (Reuters) - A tightening of Western
sanctions on Russia rattled world markets on Thursday, sending
Moscow stocks and the rouble tumbling and lifting traditional
safe-haven currencies and bonds.
    The new U.S. sanctions announced late on Wednesday
effectively shut off longer-term dollar funding for companies
close to President Vladimir Putin. European Union leaders agreed
to target Russian firms that help destabilise Ukraine, and to
block new loans to Russia through two development banks.
  
    Such measures had been threatened for weeks, but the
decision to push ahead unsettled investors who had questioned
the appetite to do so, especially in Europe.
    Moscow's MICEX stock market fell 2.9 percent, its
dollar-traded cousin, the RTS index, dropped 4.5 percent
and the rouble lost more than 1 percent against both the
dollar and the euro. 
    "From the West's perspective they could not have chosen a
better time to intensify sanctions," said Societe Generale
strategist Regis Chatellier. "Until a few weeks back, Russia was
in a position of relative strength because there was massive
pressure on oil, but that is not the case any more."
    Safe-haven assets were given a broad lift, with concerns now
that Moscow - which provides much of Europe's gas - could hit
back with retaliatory measures.
    The sanctions are aimed at tightening pressure on Moscow to
help calm the crisis in Ukraine, where hundreds of people have
been killed in months of fighting between government forces and
pro-Russian separatists.
    The Russian Foreign Ministry said it saw the American
sanctions as "a primitive attempt to avenge the fact that
developments in Ukraine are not following Washington's
scenario," and that it was disappointed that Europe had
"succumbed to the blackmail of the U.S." 
    The Japanese yen, Swiss franc, gold and
German government bonds were all higher as the
selling of riskier assets gained momentum.
    Interest rates on German government bonds dipped to be
within a whisker of their 2012 all-time low. The pan-European
FTSEurofirst 300 was down 0.8 percent as some mixed
earnings and Wednesday's gains - the biggest in three months -
also bred caution among investors 
       
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   Asset returns in 2014         link.reuters.com/gap87v
   Russia stocks                 link.reuters.com/guv77v 
   Currencies v dollar           link.reuters.com/tak27s
   ECB rates, inflation and euro link.reuters.com/jer39v 
   ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
        
    SAFETY FIRST
    Asian equities had dipped overnight too, led by Chinese
shares. That came despite a fresh record high for Wall Street's
Dow Jones Industrial index. 
    Mid-year earnings are now in full swing. Later in the day
internet giant Google reports its results, topping a heavy slate
of big hitters which was kicked off by an upbeat pre-market
release from Morgan Stanley. 
    The bank's earnings more than doubled as its investment
banking and wealth management businesses more than made up for a
fall in bond trading. Nevertheless, Wall Street was expected to
open around 0.4-0.5 percent lower.  
    "U.S. earnings have been pretty good so far," said IG Index
strategist Alastair McCaig. "It's early doors, but at the moment
the ratio is seven-to-one beating expectations." 
    In the currency market, the Russia tensions helped the
safe-haven yen inch up to 101.50 yen to the dollar. It
also hit a five-month high against the euro as the recent
downward trend in the euro zone's shared currency continued.
    "Remember earlier in the week we also had (Federal Reserve
chief) Janet Yellen warning about some stocks being a bit
overvalued... so there is anxiety not too far below the surface
about some asset prices," said Jane Foley, a foreign exchange
strategist at Rabobank in London.
    Data suggesting a shaky start for Germany in the new quarter
and wariness about banking problems in Portugal have hobbled the
euro this week. 
    Thursday's revised euro zone inflation data underscored the
need for the ECB, which has talked about large-scale bond buys,
to stay on its toes, as it remained deep in what Mario Draghi
has termed the sub-1 percent "danger zone." 
   
    OIL, GOLD CLIMB 
    The Russia/West tensions also rumbled in the background in
commodities markets, though there were other factors at play
too.
    Oil saw its second day of $1-plus gains, after government
data showed U.S. stockpiles dropped last week. U.S. crude 
was up 1.2 percent at $102.4 a barrel with Brent 
fetching almost $108.
    Gold ticked higher to trade above $1,302 an ounce, though it
remained near a four-week low as investors weighed the
possibility U.S. interest rates would rise sooner than expected.
 
    Gold has been under pressure since tensions in Iraq have
cooled, and Yellen said on Tuesday the U.S. central bank could
raise rates earlier or faster if hiring and wages take off in an
unexpected way. 

 (Additional reporting by Sujata Rao in London; Editing by Mark
Trevelyan)