LONDON (Reuters) - Fighting
in Iraq and Ukraine drove a global shift into
traditional safe-haven currencies, precious metals and
bonds on Monday, and kept oil near a nine-month high.
The nervous mood also spread to share markets where the Nikkei .N225
in Tokyo saw its biggest fall in a month and European bourses .FTEU3
were deep in the red for the third time in four days.
Worries about Iraq were intensifying after Sunni insurgents from the
Islamic State of Iraq and the Levant (ISIL) seized a mainly ethnic
Turkmen city in the northwest of the country over the weekend.
It continued to drive fears about widespread turmoil in the country
and the region. Iraq is oil cartel OPEC's second largest producer
and Brent LCOc1 was up 0.3 percent to $112.70 per barrel in London,
although it was a some distance from Friday's nine-month high of
$114.69.
"I think investors are starting to look at this in terms of global
risk aversion," said Stuart Culverhouse, chief economist at emerging
market specialist brokerage Exotix.
"Clearly it is a fairly fluid and dangerous situation, but if there
is a significant deterioration in events, then that is pretty much a
lose-lose for everyone."
The rising oil prices and shrinking risk appetite weighed on
emerging Asian currencies particularly, with the rupee INR=D2
hitting a five-week low and the rupiah IDR=ID and the South Korean
won KRW=KFTC also withering.
It was a boon for safe-havens though. Among the major currencies the
yen JPY= and Swiss franc CHF= rose EMRG/FRX, while gold XAU= hit its
highest in nearly three weeks at $1,279.80 an ounce.
UKRAINE STRAINS
Iraq wasn't the only source of concern either. Hopes of Ukraine
coming off the boil were dashed after pro-Russian separatists shot
down a Ukrainian army transport plane, killing all 49 military
personnel on board.
Economic salvos also resumed as Russian gas exporter Gazprom GAZP.MM
said Ukraine had failed to adhere to a deadline to pay at least some
of its gas debts. Kiev will now have to pay up front, suggesting
supplies could be cut. (Full Story)
That saw both Russian and Ukraine assets fall sharply. Moscow's
dollar-denominated RTS index .IRTS dropped as much as 2.5 percent as
Gazprom shares slumped GAZP.MM, while Ukrainian and the rouble RUB=
and hryvnia UAH= tumbled as well.
"The next big question is whether there will be any new sanctions on
Russia, probably more likely from the U.S.," said Viktor Szabo a
fund manager at Aberdeen Asset Management.
The dollar JPY slipped about 0.2 percent to 101.89 against the
in-demand yen to leave it near a two-week low, while bets the U.S.
may end up raising interest rates after Britain saw the pound GBP=D4
climb to 5-year high of $1.70.
Top-rated euro zone bonds also pushed higher as concerns over the
escalating geopolitical tensions supported safe-haven government
debt, outweighing general market caution ahead of the U.S. Federal
Reserve's meeting which concludes on Wednesday.
The central bank is expected to press on with its $10
billion-a-month reductions in stimulus. But with it also expected to
nudge down its economic forecasts, all eyes are rate hints.
"The market is already expecting less (monetary policy) tightening
ahead," said Lee Hardman a currency analyst at Bank of Tokyo
Mitsubishi UFJ in London, referring to the recent pricing changes in
Fed fund futures contracts 0#FF:.
Wall Street ESc1 was expected to be dragged back by the Iraq worries
when trading resumes, with Monday's main data focus the NAHB housing
market survey for June.
Other data in focus this week is China's latest report on foreign
direct investment on Tuesday, and then house price figures on
Wednesday.
China's Shanghai Composite Index .SSEC was one of the few markets to
register a solid gain on Monday but investors would be concerned if
the latter were to show a slowdown in property price growth, raising
further questions about the sector, especially given the broader
economic weakness.
(Additional reporting by Lisa Twaronite in Toko Editing by Jeremy
Gaunt)
