Fears of escalation in Ukraine roils markets

August 6, 2014 - 11:35 AM
Financial Markets Wall Street

People pass in front of the New York Stock Exchange in this Monday, March 9, 2009 photo. Worries over Russian troops amassing near the Ukraine border caused a sharp sell-off in global stock markets on Wednesday Aug. 6, 2014. (AP Photo/Mark Lennihan)

LONDON (AP) — Fears that the crisis in Ukraine is escalating into a new and dangerous phase roiled financial markets, particularly in Europe, on Wednesday.

Following allegations of a buildup of around 20,000 Russian troops on the border of Ukraine and the prospect of tit-for-tat sanctions between the West and Moscow, investors have grown increasingly vexed by the situation in Ukraine.

Those concerns have been particularly notable in the performance of gold, which through its status as a safe haven is often a barometer of geopolitical stress. An ounce of gold rose $24, or 1.9 percent, to $1,309.

And despite a calmer mood on Wall Street Wednesday, the Stoxx 50 index of leading European shares closed down 0.7 percent. The retreat came in the wake of comments from Polish Prime Minister Donald Tusk that he has information indicating that there is a growing threat of a "direct intervention" by Russia in Ukraine.

Tusk's comments come a day after John Ging, director of U.N. humanitarian operations, warned the Security Council at an emergency meeting requested by Russia that the humanitarian situation in eastern Ukraine is steadily worsening as power and water supplies are scarce, homes are destroyed and health workers flee.

The fear in the markets is that Russia may use these reports of a humanitarian crisis to justify a military incursion, which would clearly ratchet up tensions with the West.

"So long as the Russians opt to stay their side of the border, markets are likely to become more relaxed, but any further ratcheting up of tensions will provide the excuse for more rapid selling," said Brenda Kelly, chief market strategist at IG.

However realistic the concerns of a Russian invasion are, investors are also getting vexed by fears that the sanctions imposed on Russia by the European Union and the United States could impact economically on both sides.

On Wednesday, President Vladimir Putin ordered government agencies to restrict imports of food and agricultural products from the countries that have imposed sanctions against Russia over the conflict in Ukraine.

Europe stands to lose the most from an escalation given its big trading relationship with Russia. Already, European businesses that have ties with Russia's financial, military and energy sectors stand to lose out from the sanctions.

Even those that don't have direct links to those sanctioned sectors are cautioning over the outlook. German sportswear company Adidas, for example, recently expressed worries over the impact on its business.

So far, European companies appear to be bearing up, though analysts fear it won't take much of an increase in tensions between the West and Russia to start crimping the recovery.

"Loss of export revenues is the most obvious channel, but there may also be damage to business confidence given the heightened uncertainty," James Ashley, chief European economist at RBC Markets.