Marc Jones: “Europe holds nerve as Russia-Ukraine warnings ratchet up” – Reuters

Posted on :Sep 01, 2014

By: Marc Jones

Reuters

September 1, 2014

(Reuters) – European markets cautiously set aside warnings that Russia’s conflict with Ukraine was sliding out of control on Monday, as investors focused on the European Central Bank’s meeting this week and hopes it will strengthen its stimulus plans.

Shares on the region’s FTSEurofirst 300 index .FTEU3 nudged 0.2 percent higher in early trading following a similar performance by Asian stocks despite some mildly disappointing data from China.

Euro zone periphery bonds suggested that appetite for risk was alive as the euro also held its ground at $1.3132 EUR= as it hovered just above a one-year low against the dollar and a two-year low versus the British pound. EURGBP=

“Naturally, developments between Russia and the Ukraine will be in the cross sights. However, despite more concerning rhetoric that tensions are nearing a point of no return, we haven’t really seen a heavy bias towards defensive trading strategies today,” IG chief market strategist Chris Weston said in a note to clients.

Ukrainian President Petro Poroshenko warned at the weekend that a “full-scale war” was imminent if Russian troops continued to advance in support of pro-Moscow rebels and U.S. and European leaders threatened further economic sanctions on Russia within a week.

Moscow appeared in no mood to back down however. Vladimir Putin called on Sunday for immediate talks on the “statehood” of southern and eastern Ukraine and his Foreign Minister Sergei Lavrov gave a strong hint on Monday that Russia would retaliate to European sanctions with its own measures.

Dollar-traded shares in Moscow .IRTS took another tumble in early trading and the roubleRUB= fell 1 percent to hit a new record low.

The euro in contrast barely budged EUR= after dropping as low as $1.3119 at the end of last week, while the dollar index edged up to 82.764 .DXY in Asian trade, not far from Friday’s 13-month high of 82.773.

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 in the euro zone.

Inflation in the 9.6 trillion euro economy dropped to a fresh five year low of 0.3 percent in August and as the months fly by, the bloc’s cushion against Japan-style deflation is getting smaller and smaller.

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 French calls for the ECB to tackle the problem of an overvalued euro.

“Pressure for the ECB to do more has returned, not only because of weak output/inflation data, but mostly following (ECB’s President Mario) Draghi’s speech in Jackson Hole,” said Frederik Ducrozet, senior euro zone economist at Credit Agricole. He was referring to comments by Draghi in a speech last month saying the ECB was prepared to respond with all “available” tools if inflation drops further.

CHINA DISAPPOINTS

U.S. markets will be closed on Monday for the Labor Day holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS shrugged off early losses and was last up about 0.3 percent, moving back toward last Thursday’s six-and-a-half-year peak.

Japan’s Nikkei stock average .N225 ended up 0.3 percent, taking back some ground lost in August, when it shed 1.3 percent.

The gains came even after an official index of China’s manufacturing sector fell from a 27-month high in August to show slow growth, although it was still the second-highest reading this year.

The final HSBC/Markit Purchasing Managers’ Index also dropped, showing marginal growth in business activity last month.

“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 Bank of Japan will also meet this week, but is expected to hold monetary policy steady for now despite a spate of weak economic data last week.

The dollar rose slightly to 104.17 yen JPY=, moving back toward last week’s seven-month high of 104.49.

In commodities trading, palladium XPD= climbed about 0.4 percent to $903.25 an ounce, near a 13-1/2 year peak of $907 hit on Friday. Spot gold XAU= fell slightly to $1,287.39 an ounce, after posting a small weekly gain.

The weaker-than-expected China data weighed on oil prices. U.S. crude CLc1 slipped about 0.4 percent to $95.57 a barrel after marking a monthly loss in August. Brent was off 0.3 percent at $102.84 a barrel.

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