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 With Russian troops already on Ukrainian soil after an incursion
into Crimea, comments over the weekend from President Vladimir Putin
that he had the right to invade the rest of the country were treated
as a declaration of war by Kiev.
Geopolitical ripples from those statements, which included
condemnation from the Group of Seven major industrialized nations,
spread through markets, hitting Russian assets the hardest and
forcing the Russian central bank to aggressively raise interest
rates.
Russia's stock market nosedived 9 percent at the open on Monday
while the rouble fell 2 percent to record lows against the dollar
and the euro before recovering to trade up 1.3 percent after the
central bank dramatically lifted its key lending rate by 1.5
percentage points to 7 percent at an unscheduled meeting.
Russia's sovereign dollar bonds were also hit, down 2 points, while
the cost of buying 5-year swaps to insure against a Russian debt
default jumped 33 basis points.
"Investors had underestimated the risks of an escalation in Ukraine,
so the events over the weekend are a wake-up call for the market,"
said David Thebault, head of quantitative sales trading at Global
Equities in Paris.
 The escalating tensions sent Ukraine's hryvnia to a record low
against the dollar and pushed the country's dollar bonds down 6
points on Monday, in contrast to a jump in safe-haven German Bund
futures, which rose 64 ticks.
No major regional bourse escaped the aggressive selling, with all
down more than 1 percent and Germany's DAX particularly hard hit,
tumbling 2.3 percent.
That had followed overnight weakness in Asia, with MSCI's broadest
index of Asia-Pacific shares outside Japan down 0.9 percent and
Japan's Nikkei 225 skidding 1.3 percent, while futures for the U.S.
Standard & Poor's 500 slid 0.8 percent off Friday's record high.
"We can expect some very sharp moves in the ensuing couple of days
as markets and world leaders look to establish just how much of a
threat there is to not only to stability in the area but stability
across Europe," said James Hughes, chief market analyst at Alpari
UK.
Chief beneficiaries of the market-wide flight from risk were gold,
German benchmark debt and the Japanese yen and other currencies
perceived as safe havens in times of heightened volatility, while
oil was supported by the demand outlook.
Concern about China's economy also weighed on markets after a
purchasing managers' index showed China's vast factory sector
contracted again in February.
Spot gold hit a four-month intraday high of $1,350 an ounce and the
dollar hit a near one-month low against the yen and approached
Friday's two-year low against the Swiss franc before pulling off
their respective highs/lows.
"It's a reaction to the escalation in tension in Ukraine over the
weekend ... the traditional risk proxies are getting hit, and the
safe havens are getting bid," said ANZ currency strategist Sam Tuck
in Auckland.
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The euro shed 0.2 percent against the dollar to $1.3778, slipping
from Friday's two-month high as the euro zone economy is seen as
vulnerable because of its dependence on gas supplies from Russia,
part of which go through Ukraine.
Worries that Putin could act to restrict those gas supplies if the
situation escalates further, and the prospect of a typical run-up in
demand should war break out, boosted crude prices across the board.
Brent crude, the European oil benchmark, rose as much as 2 percent
to a two-month high of $111.41 per barrel before trimming gains
slightly. U.S. crude futures, meanwhile, hit a five-month high of
$104.65.
"But... if it actually comes to war. U.S. crude could easily surpass
$110 and a $120 target is not out of the question," said Ben Le
Brun, market analyst at OptionsXpress.
Ukraine said, however, that it was pumping Russian gas as normal.
On top of concerns about a military confrontation, it was not clear
if Ukraine's new interim government, formed only about a week ago
after pro-Russian former President Viktor Yanukovich was ousted, can
secure funds to avoid default.
Kiev has said it needs $35 billion over two years to avoid default,
and may need $4 billion immediately. But Ukrainian Finance Minister
Oleksander Shlapak said on Saturday the country was unlikely to
receive financial assistance from the International Monetary Fund
before April.
Elsewhere, the yield on 10-year U.S. debt slid to a one-month low of
2.592 percent, before recovering to trade at 2.62 percent ahead of
the release of important economic data this week including payrolls
numbers on Friday and manufacturing data later on Monday.
A private survey of the latter in China found factory activity
shrank again in February as output and new orders fell, reinforcing
concerns about a slowdown in the world's No. 2 economy.
That offset a more upbeat survey from the Chinese services sector
and pushed copper down to a three-month low. China is the world's
top metals consumer and the market is already concerned about
growing copper stockpiles in China.
(Additional reporting by Hideyuki Sano in Tokyo, Naomi Tajitsu in
Wellington; Christopher Johnson and Sudip Kar-Gupta in London;
Editing by Jacqueline Wong and Susan Fenton)
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