GLOBAL MARKETS-Gold, oil rise as Ukraine tensions spur safety bids

Reuters - UK Focus

* Stock prices tumble after military intervention in Ukraine

* Russia hikes interest rate after ruble slides

* Brent crude at 2-month high on fear Putin may cut gas flow

* Russian stocks fall 11 pct; European bank shares slump

By Herbert Lash

NEW YORK (Frankfurt: HX6.F - news) , March 3 (Reuters) - Russia's intervention inUkraine drove up crude oil and prices for gold and governmentdebt on Monday as the heightened tensions spurred investors toseek safe havens and sell any exposure to the region.

Crude prices rose more than $2 a barrel, gold futures jumped2 percent and prices of top-rated euro zone government bondssurged. The aversion to risk took a steep toll on stock markets,with the Moscow bourse slumping 11 percent, wiping nearly$60 billion of value off Russian companies.

Stocks across Europe and on Wall Street also took a beating.

Market volatility indexes, a sign of investor apprehension,surged, with the Euro STOXX Volatility Index spiking30.4 percent in its biggest one-day gain since 2011. The U.S.CBOE volatility index surged 20 percent at one point, and endedthe session 14.5 percent higher.

"Investors had underestimated the risks of an escalation inUkraine, so the events over the weekend are a wake-up call forthe market," said David Thebault, head of quantitative salestrading at Global Equities in Paris.

President Vladimir Putin's forces tightened their grip on the Crimea region of Ukraine, sparking the stock plunge inMoscow and forcing Russia's central bank to spend $10 billion ofreserves to prop up the ruble.

Ukraine said Russia was massing armored vehicles on its sideof a narrow stretch of water closest to Crimea after Putindeclared over the weekend that he had the right to invade hisneighbor to protect Russian interests and citizens.

The ruble traded off about 1.45 percent after earliertouching record lows against the dollar and the euro. Thecentral bank lifted its base lending rate by 1.5 percentagepoints to 7 percent at an unscheduled meeting.

Russia's sovereign dollar bonds also fell,while the cost of buying five-year swaps to insure against aRussian debt default jumped 33 basis points.

Ukraine's hryvnia currency fell to a record lowagainst the dollar, pushing the country's dollar bonds down 6points. Safe-haven German Bund futures settled up 76ticks at 145.14.

Banks took the most points off European stock indexes, withlenders exposed to Ukraine and Russia falling sharply. The EuroSTOXX banks index fell 3.8 percent in the biggest dropsince last August. Austria's Raiffeisen slumped 9.6percent, while France's Societe Generale (Paris: FR0000130809 - news) fell 5.4percent and Italy's UniCredit (Berlin: CRIH.BE - news) lost 6.2 percent.

Other companies with significant exposure to Russia alsofell, with carmaker Renault (TLO: RENA-U.TI - news) shedding 5.4 percent andbrewer Carlsberg (Other OTC: CABGY - news) losing 5.3 percent.

The pan-European FTSEurofirst 300 index fell 2.2percent to close at 1,318.24.

No major European stock market escaped the sell-off, withGermany's DAX particularly hard hit, falling 3.4percent in its biggest single-day drop since May 2012.

France's CAC-40 index fell 2.7 percent, and theItalian stock market slid 3.3 percent.

"This has shown itself to be a broad risk-off event. Most ofthe action has been focused on stocks in Europe and the energysector. A good portion of the market has not reacted to a largedegree," said Sam Diedrich, a portfolio manager at PacificAlternative Asset Management Co. in Irvine, California.

"The most likely end-game is a grumpy compromise that allowsUkraine to go its own way in the world while allowing Russiamore influence over Crimea," said David Kelly, chief globalmarket strategist at JPMorgan Funds in New York.

"If so, uncertainty should fade and the economic data, asthe weather improves, should still support a modest over-weightto U.S. stocks over bonds," Kelley said.

Putin will not back off but has no need to push further,suggesting markets might soon rebound, said Brad McMillan, chiefinvestment officer at Commonwealth Financial, in Waltham,Massachusetts.

"With the substantial downsides and costs of the West tryingto reverse it, Europe will probably punt and we will revert tonormal faster than anyone expects," McMillan said.

The declines in Europe followed overnight weakness in Asia,with MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan down 0.9 percent and Japan's Nikkei 225 skidding 1.3 percent.

On Wall Street, the Dow Jones industrial average closed down 153.68 points, or 0.94 percent, at 16,168.03. TheS&P 500 lost 13.72 points, or 0.74 percent, to 1,845.73and the Nasdaq Composite dropped 30.818 points, or 0.72percent, to 4,277.301.

For U.S. investors, Russia's intervention in Ukraine comesjust as economic data has been expected to improve and providefurther upside for stocks on Wall Street, noted David Joy, chiefmarket strategist at Ameriprise Financial.

Data released on Monday showed renewed strength in U.S.manufacturing. But tensions over Ukraine have changed theinvestment outlook at a time when valuations for U.S. equitiesare not cheap, Joy said.

"Being expensive, it makes sense to me to take some risk offthe table and wait to see how this plays out," he said.

U.S. factory activity rose in February to its highest levelsince May 2010, according to financial data firm Markit.Separately, the Institute for Supply Management said its indexof U.S. factory activity rose to 53.2 in February, toppingexpectations.

The dollar and yen gained as investors sought the safety ofthose currencies after Russia's intervention.

The greenback was also supported by economic data showing anincrease in U.S. personal income and spending in January in themidst of one of the worst winters in recent memory.

The dollar index was up 0.47 percent to 80.068. Thedollar's gains pushed the euro 0.51 percent lower at$1.3732.

Crude oil prices jumped. Brent crude hit a peak of$112.39 a barrel, the highest level since Dec. 30. Brent settled$2.13 higher at $111.20 a barrel. U.S. crude jumped $2.33to settle at $104.92 a barrel.

Gold futures settled up $28.70, or 2.2 percent, at$1,350.3 an ounce.

U.S. government bond prices rose, with the 10-year note up 16/32 in price to yield 2.6030 percent.

View Comments (0)