|
 Ukrainian President Petro Poroshenko said Russian forces had entered
Ukraine, and he convened his security and defence council to decide
how to respond.
The tensions put riskier assets firmly under pressure, with Moscow
stocks slumping and the top share index in Germany -- whose
corporate sector has strong trade ties with Russia -- dropping more
than 1.3 percent after other sources also reported Russian troops
had crossed the border to fight alongside separatists.
Safe-haven investments were in demand, with yields on German
government bonds, the traditional go-to asset for risk-wary European
investors, hitting all-time lows as the yen and Swiss franc
rose.
The bruised euro also clung to modest gains as bets were laid on
possible fresh ECB stimulus next week aside amid the fast-moving
developments in Ukraine and as German CPI data suggested deflation
remains unlikely in the bloc for now.
Ahead of the Germany-wide August inflation number due at 1200 GMT,
there were solid readings from three of its biggest regions. Similar
Spanish figures also saw a slightly smaller-than-forecast drop as
revised second quarter GDP numbers held up too.
Talk of fresh ECB policy easing erupted last week following a
strongly-worded speech from the bank's President. But sources at the
central bank told Reuters on Wednesday that new action was unlikely
next week unless Friday's inflation numbers showed the bloc clearly
heading for deflation.
"Germany is roughly 30 percent of the euro zone so if that
(inflation rate) stays stable, it limits the downside for the
overall region," said Berenberg Bank economist Christian Schultz.
"It seems to me the weaker euro is helping."
RUSSIAN CHILL
European stocks had started the day quietly following a subdued
showing in Asia but by mid-session, markets in London, Frankfurt and
Paris <.FCHI> were nursing losses of 0.5, 1.4 and 0.8 percent.
Futures markets pointed to Wall Street opening down 0.4 percent when
U.S. trading restarts. For economists there is plenty of U.S. data
slated, including the Fed's favoured measure of inflation, revised
second quarter GDP and unemployment claims.
The news out of Ukraine dealt a blow to hopes of an easing of the
conflict after this week's meeting between Poroshenko and his
Russian counterpart Vladimir Putin.
Russia denies intervening in Ukraine by arming the rebels or sending
soldiers across the border.
Ukrainian Prime Minister Arseny Yatseniuk appealed on Thursday to
the U.S. Europe and other G7 countries "to freeze Russian assets and
finances until Russia withdraws armed forces, equipment and agents".
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Dollar-traded stocks in Moscow tumbled 3.3 percent and the rouble
dropped 1.4 percent as they saw their biggest falls in a month,
while Ukraine's credit default swaps surged to three-month highs and
its currency and dollar bonds fell.
"Recent optimism around a negotiated solution to the crisis as
reflected in market pricing appears overdone in our view," JP Morgan
analysts wrote in a note to clients.
INFLATION EXPECTATIONS
Away from the political tensions, the Australian dollar was in
demand after second quarter business investment data beat forecasts,
while the U.S. dollar all but sat on recent gains.
U.S. Treasuries had rallied overnight as month-end buying helped
send 30-year yields to their lowest in over a year. Core euro zone
government bond yields continued to plough record lows as markets
waited on the ECB's next move, though the drop in risk appetite left
periphery bonds out of favour for once.
"For the euro area, inflation may now be 0.3 or 0.4 percent but I
don't think this one figure is of major importance," said Piet
Lammens, a strategist at KBC in Brussels.
"What is important is that (ECB head Mario) Draghi said (in a recent
speech) that during August inflation expectations have dropped
substantially."
Among commodities, Brent crude oil dipped towards $102 a barrel
after choppy trading overnight following a report showing declining
U.S. gasoline demand.
Aluminium -- of which Russia is a large producer -- pushed higher as
traders mulled possible supply issues while precious metals and safe
havens gold, silver and platinum all made ground.
(Additional reporting by Sujata Rao and Marius Zaharia in London,
editing by John Stonestreet)
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