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Ukraine, Russia tensions rock stocks, buoy core bonds

Pedestrians walk past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo August 8, 2014. REUTERS/Yuya Shino/Files

By Marc Jones

LONDON (Reuters) - European shares took a sharp tumble on Thursday as accusations by Ukraine that Russia had moved troops across the border brought a three-day global rally to a shuddering halt.

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 (.GDAXI) -- 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.

Wall Street, which has repeatedly set all-time highs in recent weeks, was set to open lower too despite second quarter growth being revised up and unemployment claims falling as part of an early flurry of data.

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 [GVD/EUR] and the yen (JPY=) and Swiss franc (CHF=) on the rise. [FRX/]

The bruised euro (EUR=) also clung to modest gains as bets were laid aside on possible fresh ECB stimulus next week amid the fast-moving developments in Ukraine and as German CPI data suggested deflation remains unlikely in the bloc for now.

German inflation came in at a steady 0.8 percent ahead of Friday's euro zone number. Corresponding Spanish figures saw a slightly smaller-than-forecast drop as revised second quarter GDP 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."


European stocks (.FTEU3) had started the day quietly following a subdued showing in Asia but as the start of U.S. trading approached, London (.FTSE), Frankfurt (.GDAXI) and Paris (.FCHI) were nursing losses of 0.5, 1.4 and 0.8 percent. Futures prices (ESc1) pointed to Wall Street starting down 0.3 percent.

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".

Dollar-traded stocks in Moscow (.IRTS) tumbled 3.3 percent and the rouble (RUB=) 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.


Away from the political tensions, the Australian dollar was in demand after second quarter business investment data beat forecasts, while the U.S. dollar (.DXY) all but sat on recent gains as Thursday's data deluge started.

U.S. Treasuries had rallied overnight as month-end buying helped send 30-year yields to their lowest in over a year. [US/] 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 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. [O/R]

Aluminium -- of which Russia is a large producer -- pushed higher (CMAL3) as traders mulled possible supply issues while precious metals and safe havens gold (XAU=), silver (XAG=) and (XPD=) platinum all made ground. [GOL/]

(Additional reporting by Sujata Rao and Marius Zaharia in London, editing by John Stonestreet)