September 1, 2014 / 8:45 AM / 4 years ago

GLOBAL MARKETS-European investors look past Ukraine, focus on ECB

* European markets shrug off Ukraine-Russia tension
    * Euro steady after touching 1-year low versus dollar
    * Chinese manufacturing data underscore cooling risk
    * U.S. markets closed for Labor Day holiday

    By Marc Jones
    LONDON, Sept 1 (Reuters) - European markets advanced despite
the conflict in Ukraine, focusing on whether the European
Central Bank will announce plans for economic stimulus when it
meets this week.
    Ukraine reported its forces were under fire from Russian
tanks again on Monday, as new signs emerged that
the turmoil was damaging the European economy.
    Manufacturing output in the euro zone grew at its slowest
pace in more than a year and factories reported falling orders
as weakness showed up in most corners of the region.
    "Although some growth is better than no growth at all, the
braking effect of rising economic and geopolitical uncertainties
on manufacturers is becoming more visible," said Rob Dobson,
senior economist at Markit.
    "France remains a real concern, as does Italy's descent from
solid expansion to stagnation. Signs that growth impetus waned
in the key industrial engine of Germany, and in Spain and the
Netherlands, too, is also less than reassuring."
    Even so, shares on Europe's FTSEurofirst 300 index 
largely held their ground after markets in Asia shrugged off
some disappointing data from China. 
    U.S. markets were closed for the day, but gains by bonds
from the euro zone periphery suggested that appetite for risk
remained alive. The euro also recovered to $1.3133 after
reaching a one-year low against the dollar overnight.
    Geopolitics remained front and centre. Ukrainian President
Petro Poroshenko accused Russia on Monday of "direct and
undisguised aggression", after warning over the weekend of a
possible "full-scale war". 
    European Union leaders were drawing up new sanctions against
Moscow. EU sources told Reuters that Europeans
could be barred from buying new Russian government bonds.
Another said the EU might restrict its gas exports and limit
industrial use if Russia starts to clamp down on supply or push
up prices.  
    Moscow appeared in no mood to back away, though. Vladimir
Putin had called on Sunday for talks on the "statehood" of
southern and eastern Ukraine, and as fighting continued in
Ukraine his foreign minister, Sergei Lavrov, hinted Russia would
hit back if Europe imposed new sanctions.{ID:nL5N0R20LI]
    With Russia's economy already struggling, the threat of new
European action pushed dollar-traded shares in Moscow 
down 1 percent, the rouble to a record low and Russian
borrowing costs to a five-year high. 
    The euro, in contrast, barely budged throughout the
European day. Core euro zone bond yields remained at record lows
 and the dollar index held near a 13-month high.
    Chancellor Angela Merkel acknowledged that enacting further
sanctions against Russia might hurt the German economy but said
doing nothing was "not an option". 
    The European Central Bank meets on Thursday and is the prime
event for markets seeking clarity on the euro zone's response to
a stalled recovery, disappearing inflation and the sluggish pace
of reform.
    Inflation in the 9.6 trillion euro economy dropped to a
five-year low of 0.3 percent in August, a sign that the euro
zone's cushion against Japan-style deflation is getting thinner.
    Benoit Coeure, one of the ECB's top policymakers, said in an
interview over the weekend that the bank is ready to adjust its
monetary policy further if needed. French Prime Minister Manuel
Valls also repeated his calls for the ECB to tackle the problem
of an over-valued euro. 
    "Pressure for the ECB to do more has returned, not only
because of weak output/inflation data, but mostly following (ECB
President Mario) Draghi's speech in Jackson Hole," said Frederik
Ducrozet, senior euro zone economist at Credit Agricole. Draghi
said last month the ECB was prepared to respond with all
"available" tools if inflation drops further.
    U.S. markets were closed on Monday for the Labor Day holiday
but it will be a busy week for markets, with central bank
meetings in six of the G-10, three major emerging markets and
U.S. jobs data on Friday. 
    MSCI's broadest index of Asia-Pacific shares outside Japan
 had ended up 0.25 percent and Japan's Nikkei
stock average finished 0.3 percent higher.
    The gains came even after an official index of Chinese
manufacturing fell from a 27-month high in August. That was
still the second-highest reading this year. 
    "The economy still faces considerable downside risks to
growth in the second half of the year, which warrants further
policy easing," said Qu Hongbin, an economist at HSBC.
    The weaker-than-expected data weighed on oil prices. U.S.
crude slipped about 0.4 percent to $95.60 a barrel after
marking a monthly loss in August. Brent was off 0.4 percent at
$102.81 a barrel and growth-attuned metal copper also
    The dollar rose slightly against the yen to 104.17,
moving back toward last week's seven-month high of 104.49. The
Bank of Japan is one of those meeting this week, and it is
expected to hold fire for now despite weak economic data last

 (Additional reporting by Lisa Twaronite in Tokyo, Martin Santa
in Brussels; Editing by Larry King)
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