GLOBAL MARKETS-Ukraine, Russia tensions rock stocks, buoy core bonds

Thu Aug 28, 2014 9:11am EDT

* Euro stocks tumble, Bund yields hit new lows
    * Moscow markets see biggest fall in a month
    * Wall Street expected to open 0.3 pct lower despite strong
data
    * Precious metals gain as risk assets lose out

    By Marc Jones
    LONDON, Aug 28 (Reuters) - European shares took a sharp
tumble on Thursday as accusations by Ukraine that Russia had
moved troops across the border brought a three-day global rally
to a shuddering halt. 
    Ukrainian President Petro Poroshenko said Russian forces had
entered Ukraine, and he convened his security and defence
council to decide how to respond. 
    The tensions put riskier assets firmly under pressure with
Moscow stocks slumping and the top share index in Germany
 -- whose corporate sector has strong trade ties with
Russia -- dropping more than 1.3 percent after other sources
also reported Russian troops had crossed the border to fight
alongside separatists.  
    Wall Street, which has repeatedly set all-time highs in
recent weeks, was set to open lower too despite second quarter
growth being revised up and unemployment claims falling as part
of an early flurry of data.   
    Safe-haven investments were in demand, with yields on German
government bonds, the traditional go-to asset for
risk-wary European investors, hitting all-time lows 
and the yen and Swiss franc on the rise. 
    The bruised euro also clung to modest gains as bets
were laid aside on possible fresh ECB stimulus next week amid
the fast-moving developments in Ukraine and as German CPI data
suggested deflation remains unlikely in the bloc for now.
    German inflation came in at a steady 0.8 percent ahead of
Friday's euro zone number. Corresponding Spanish figures saw a
slightly smaller-than-forecast drop as revised second quarter
GDP held up too.  
    Talk of fresh ECB policy easing erupted last week following
a strongly-worded speech from the bank's President. But sources
at the central bank told Reuters on Wednesday that new action
was unlikely next week unless Friday's inflation numbers showed
the bloc clearly heading for deflation. 
    "Germany is roughly 30 percent of the euro zone so if that
(inflation rate) stays stable, it limits the downside for the
overall region," said Berenberg Bank economist Christian
Schultz. "It seems to me the weaker euro is helping."
    
    RUSSIAN CHILL
    European stocks had started the day quietly
following a subdued showing in Asia but as the
start of U.S. trading approached, London, Frankfurt
 and Paris were nursing losses of 0.5, 1.4 and
0.8 percent. Futures prices pointed to Wall Street
starting down 0.3 percent.
    The news out of Ukraine dealt a blow to hopes of an easing
of the conflict after this week's meeting between Poroshenko and
his Russian counterpart Vladimir Putin.
    Russia denies intervening in Ukraine by arming the rebels or
sending soldiers across the border.
    Ukrainian Prime Minister Arseny Yatseniuk appealed on
Thursday to the U.S. Europe and other G7 countries "to freeze
Russian assets and finances until Russia withdraws armed forces,
equipment and agents". 
    Dollar-traded stocks in Moscow tumbled 3.3 percent
and the rouble dropped 1.4 percent as they saw their
biggest falls in a month, while Ukraine's credit default swaps
surged to three-month highs and its currency and dollar bonds
fell. 
    "Recent optimism around a negotiated solution to the crisis
as reflected in market pricing appears overdone in our view," JP
Morgan analysts wrote in a note to clients.
  
        
    INFLATION EXPECTATIONS
    Away from the political tensions, the Australian dollar was
in demand after second quarter business investment data beat
forecasts, while the U.S. dollar all but sat on recent
gains as Thursday's data deluge started.
    U.S. Treasuries had rallied overnight as month-end buying
helped send 30-year yields to their lowest in over a year. 
Core euro zone government bond yields continued to plough record
lows as markets waited on the ECB's next move, though the drop
in risk appetite left periphery bonds out of favour.
    "For the euro area, inflation may now be 0.3 or 0.4 percent
but I don't think this one figure is of major importance," said
Piet Lammens, a strategist at KBC in Brussels.
    "What is important is that (ECB head Mario) Draghi said (in
a recent speech) that during August inflation expectations have
dropped substantially."
    Among commodities, Brent crude oil dipped towards $102 a
barrel after choppy trading overnight following a report showing
declining U.S. gasoline demand. 
    Aluminium -- of which Russia is a large producer -- pushed
higher as traders mulled possible supply issues while
precious metals and safe havens gold, silver and
 platinum all made ground. 

 (Additional reporting by Sujata Rao and Marius Zaharia in
London, editing by John Stonestreet)