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Thursday 21:10 BST. Heightened concerns about the situation in Ukraine drove a “flight-to-quality” trade in the markets as equities dropped sharply and top-tier government bonds, gold and the yen attracted buying from nervous investors.
The imposition late on Wednesday of fresh sanctions on Moscow by the US and EU triggered a wobble for European stocks, although buyers had begun to return as Wall Street gave only a muted response.
But the mood deteriorated significantly as it was confirmed that a Malaysian Airlines passenger jet en route from Amsterdam to Kuala Lumpur had crashed in eastern Ukraine near the Russian border – prompting fears that it had been shot down.
In New York, the S&P 500 equity index tumbled 1.2 per cent to 1,958, its biggest one-day fall in three months. On Wednesday, the S&P closed within 5 points of its recent record high.
The CBOE Vix equity volatility index – known as Wall Street’s “fear gauge” – was up more than 36 per cent at 15.01 in late trade, and heading for its highest close since mid-April.
Across the Atlantic, the FTSE Eurofirst 300 index fell 1 per cent while the Xetra Dax in Frankfurt shed 1.1 per cent. The Nikkei 225 in Tokyo eased 0.1 per cent.
The rouble-denominated Micex equity index shed 2.3 per cent, while the currency itself was down 1.7 per cent against the dollar to a six-week low of Rb35.18.
The yield on Moscow’s benchmark 10-year government bond climbed back above 9 per cent for the first time in two months, according to Reuters data.
Russia’s credit default swap spread widened 29 basis points to 212bp, data provider Markit said.
William Jackson, emerging markets economist at Capital Economics, noted that recent Russian economic releases had already dented hopes of a sustained recovery in the economy.
“The overall impact of the latest round of sanctions may be limited in part by Russia’s strong international investment position, which is positive to the tune of $150bn,” he said.
But Mr Jackson noted that the external position of banks and companies was much less solid.
“Indeed, Russian firms and banks have around $75bn of external debt which is due to mature over the next year and the government may have to provide financing from its reserves to help roll these debts over,” he said.
“In this context, the pick-up in investment needed to boost growth looks even more unlikely.”
Gold was a major beneficiary of the heightened mood of nervousness. The metal jumped $20, or 1.6 per cent, to $1,319 a troy ounce.
Top-tier government bonds also rose sharply with the yield on the 10-year US Treasury – which moves inversely to its price – down a hefty 8bp to 2.49 per cent. The German Bund yield fell 5bp to a record closing low of 1.15 per cent, as bond yields across continental Europe sank to historic levels and the UK 10-year gilt yield eased 6bp to 2.59 per cent.
In the currency markets, the yen was in demand, with the dollar and the euro both down 0.4 per cent at Y101.22 and Y136.91 respectively.
With events in Ukraine dominating market action, the day’s US economic releases attracted only limited attention. The Philadelphia Federal Reserve’s index of business activity hit a three-year high while initial jobless claims fell by 3,000 last week.
“We boosted our July payroll forecast to 220,000 from 210,000 and raised most of our remaining factory sentiment forecasts,” said Michael Englund at Action Economics.
“We unfortunately also saw a June drop in housing starts and permits that followed big downward revisions to leave a disappointing two-month decline for both measures.”
In the eurozone, the day’s main economic release confirmed a headline inflation rate of 0.5 per cent in June – data that are likely to maintain pressure on the European Central Bank to keep the door open to further policy easing, analysts said.
“Our base case scenario is for headline inflation to edge lower in the next few months on the back of the recent drop in oil prices, before slowly rising from October onwards as energy and food price inflation turn positive again,” said Martin van Vliet, economist at ING.
“Even so, inflation is likely to remain well below the ECB’s target until at least early 2016.”
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