June 16, 2014 / 8:42 AM / in 4 years

GLOBAL MARKETS-Iraq, Ukraine tensions keep markets on edge

(Updates ahead of Wall Street open, adds U.S. business survey
    * Main European bourses 0.3-0.5 pct lower as Iraq, Ukraine
tensions weigh
    * Crude near 9-month highs on fears of impact of Iraqi
    * Wall Street seen down, Nikkei skids to two-week closing
    * Fed meeting, China house price data in focus this week

    By Marc Jones
    LONDON, June 16 (Reuters) - Fighting in Iraq and renewed
tension in Ukraine drove a global shift into traditional
safe-haven currencies, precious metals and bonds on Monday, and
kept oil near a nine-month high.
    The nervous mood also spread to stock markets where the
Nikkei in Tokyo saw its biggest fall in a month,
European bourses were in the red for the third time in
four days.
    The same was expected from Wall Street.  
    Worries about Iraq were intensifying after Sunni insurgents
from the Islamic State of Iraq and the Levant (ISIL) seized a
mainly ethnic Turkmen city in the northwest of the country over
the weekend, in the latest scalp in a lightening
    It continued to drive fears about widespread turmoil in the
country and the region, that some specialists of the region
believe could potentially redraw borders that have been in place
since the fall of the Ottoman empire around a century ago.
    Iraq is oil cartel OPEC's second largest producer and the
worries left Brent hovering at $112.50 per barrel as it
settled slightly after a $4 jump at the end of last week had
hoisted it to a nine-month high.    
    "I think investors are starting to look at this in terms of
global risk aversion," said Stuart Culverhouse, chief economist
at emerging market specialist brokerage Exotix.
    "Clearly it is a fairly fluid and dangerous situation, but
if there is a significant deterioration in events, then that is
pretty much a lose-lose for everyone."  
    The rising oil prices and shrinking risk appetite weighed on
emerging Asian currencies particularly, with the rupee 
hitting a five-week low and the rupiah and the South
Korean won also withering.
    It was a boon for safe-havens though. Among the major
currencies the yen and Swiss franc rose
, while gold hit its highest in nearly three
weeks as it topped $1,280 an ounce for the first time this
    Iraq wasn't the only source of concern either. Hopes of
Ukraine coming off the boil were dashed after pro-Russian
separatists shot down a Ukrainian army transport plane, killing
all 49 military personnel on board. 
    Economic salvos also resumed as Russian gas exporter Gazprom
 said Ukraine had failed to adhere to a deadline to pay
at least some of its gas debts. Kiev will now have to pay up
front, suggesting supplies could be cut. 
    That saw both Russian and Ukraine assets fall sharply.
Moscow's dollar-denominated RTS index dropped as much as
2.5 percent as Gazprom shares slumped, while Ukrainian
bonds and the rouble and hryvnia tumbled too.
    "The next big question is whether there will be any new
sanctions on Russia, probably more likely from the U.S.," said
Viktor Szabo a fund manager at Aberdeen Asset Management. 

    The dollar slipped about 0.2 percent to 101.81 against
the in-demand yen to leave it near a two-week low, while bets
the U.S. may end up raising interest rates after Britain saw the
pound hit a 5-year high as it briefly topped $1.70.
    Top-rated euro zone bonds also pushed higher as concerns
over the escalating geopolitical tensions supported safe-haven
government debt, outweighing general market caution ahead of the
U.S. Federal Reserve's meeting which concludes on Wednesday.
    The central bank is expected to press on with its $10
billion-a-month reductions in stimulus. But with it also
expected to nudge down its economic forecasts, all eyes are on
any hints it gives on rates.
    "The market is already expecting less (monetary policy)
tightening ahead," said Lee Hardman a currency analyst at Bank
of Tokyo Mitsubishi UFJ in London, referring to the recent
pricing changes in Fed fund futures contracts <0#FF:>.
    Wall Street was expected to be dragged back by the
Iraq worries when trading resumes, with Monday's main data focus
the NAHB housing market survey for June. 
    Ahead of that, the New York Fed's "Empire State" general
business index beat forecasts with its strongest read since June
2010.. Other data in focus this week is China's
latest report on foreign direct investment on Tuesday, and then
house price figures on Wednesday. 

 (Additional reporting by Lisa Twaronite in Tokyo; Editing by
Jeremy Gaunt)
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