GLOBAL MARKETS-Russia puts the squeeze on Europe as focus turns to ECB

by Reuters
Thursday, 7 August 2014 12:29 GMT

* European shares, euro dip to add to recent falls

* Russian troop build-up, sanctions check risk appetite

* Investors seek shelter in safe-haven bonds, gold

* Portugal's woes continue, Wall Street seen up 0.1 pct

* Aussie dollar dives after surprise jump in jobless rate

By Marc Jones

LONDON, Aug 7 (Reuters) - The first Russian riposte in a sanctions tussle with the West over Ukraine kept European shares and the euro under pressure on Thursday, as markets wait to hear how the European Central Bank sees the crisis affecting the economy.

Stocks in the region were on edge as a week-long slide, which has also seen nervy investors drive yields on safe-haven German government debt to all-time lows, showed only tentative signs of easing.

Russia said on Wednesday it would ban all food imports from the United States and all fruit and vegetables from Europe, in a sweeping response to Western sanctions for Moscow's support for separatists in Ukraine.

As fighting has intensified on the ground in eastern Ukraine, NATO said Moscow had massed around 20,000 combat-ready troops on the Ukrainian border and warned of a possible advance.

Russian shares, which have lost almost 20 percent in the last three weeks , took another 2 percent hit, followed by Europe's main bourses in London, Frankfurt and Paris which were down 0.1-0.3 percent in choppy trading.

"The magnitude of the impact of the sanctions is hard to judge because we don't know how long they will be in place or whether there are ways that companies can get around them," said Kerry Craig, a global markets strategist at J.P. Morgan.

"I think investors are also looking at the general loss of momentum in the (European) economy we have seen in the last couple of months, looking at the world around them and adjusting their portfolios accordingly."

As German Bund yields hit their latest record low of the week and gold jumped back above 1,300 an ounce, the focus turned to what should normally be the European Central Bank's least eventful meeting of the year.

The Bank kept its interest rates at all-time lows as widely expected but markets will be keen to see what impact it thinks the tensions with Russia will have on an already fragile euro zone economy and worryingly low inflation.

The tensions have, however, aided the ECB's efforts to push down the euro. Ahead of the bank's 1230 GMT news conference, the shared currency was hovering just above a nine-month against the dollar and six-month low and the yen at $1.3372 and 136.77 yen respectively.


Also of interest to the ECB will be the fresh squalls in some debt-strained parts of the euro zone.

Portuguese stocks and bonds were again the bloc's biggest fallers on Thursday amid worries the country and its banks will have to pay dearly for the rescue of Banco Espirito Santo.

While a lot of noise has been made about Russia's troubles, Lisbon's stock market has plunged almost 30 percent since early June and Athens in Greece has lost close to 20 percent.

"The euro zone is at a crossroads and the economy can go either way," said James Knightley, an economist with ING.

Futures prices pointed to a slightly positive restart for U.S. markets on Wall Street but investors had also sold Asian stocks overnight having flocked into bonds and gold.

Despite Russia's importance as a producer, oil continued to slide too with U.S. crude Brent both at six-month lows at $96.69 and $104.36. per barrel respectively.

Sentiment had soured further in Asia after the Australian dollar, seen as a barometer of risk appetite, sank after Australia's unemployment rate jumped unexpectedly to a 12-year high, sparking talk of an interest rate cut there.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.3 percent though Japan's Nikkei average bucked the trend following a Reuters report that its public pension fund will increase allocations to stocks.


As the nervy global mood hit confidence, 10-year U.S. bond yields hovered near a two-month low at 2.45 percent. German Bunds slid to a record low of 1.086 percent while the 10-year UK gilts yield touched a one-year low of 2.503 percent.

The Bank of England, which many investors believe will be the first of the world's major central banks to raise interest rates, also made no changes after its monthly meeting.

The Bank issued no statement either and investors will now have to wait nearly two weeks to know if any of its members voted in favour of raising rates for the first time in more than three years. The suspicion is one that might have. (Additional reporting by Hideyuki Sano in Tokyo and Marius Zaharia in London, editing by John Stonestreet/Ruth Pitchford)

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