LONDON 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 destabilize 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.
"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."
Interest rates on German government bonds dipped to be within a whisker of their 2012 all-time low. The pan-European FTSEurofirst 300 .FTEU3 was down 0.8 percent as some mixed earnings and Wednesday's gains - the biggest in three months - also bred caution among investors [.EU]
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 (MS.N).
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 JPY= 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 CLc1 was up 1.2 percent at $102.4 a barrel with Brent LCOc1 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)