European stocks drop over fears of Russian attack on Ukraine

European equities sold off and traders rushed into haven assets on Monday as German chancellor Olaf Scholz prepared to travel to Moscow to make a fresh effort to deter Russia from launching an invasion of Ukraine.

The regional Stoxx Europe 600 index fell 2.9 per cent in morning dealings, in a broad decline. The UK’s FTSE 100 fell 2.2 per cent while Germany’s Dax 30 and France’s Cac 40 each fell more than 3.5 per cent. S&P 500 futures fell 1 per cent, signalling that the blue-chip US stock index might fall further after declining almost 2 per cent on Friday.

Monday’s drop came after Jake Sullivan, US national security adviser, said on Sunday that an attack by Russia against Ukraine could begin “any day now”, including “this coming week before the end of the Olympics”.

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His remarks came as western nations continued to withdraw diplomatic and military personnel from Ukraine and airlines cancelled flights to the country. Some European countries are preparing to receive a flood of refugees in the event of military action.

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Mr Scholz will travel to Kyiv on Monday before arriving in Moscow on Tuesday. The German leader is expected to urge Russian leader Vladimir Putin to de-escalate the situation on the Ukraine border, a senior government official said.

He will also convey “how grave the consequences of an attack would be” in terms of sanctions on Russia, and stress “that one should not underestimate the unity of the EU, US and UK.”

US President Joe Biden spoke to his Ukrainian counterpart Volodymyr Zelensky on Sunday, with the White House saying the US president had made clear Washington would respond to Russian military action "swiftly and aggressively".

Markets had in recent weeks broadly shrugged off the situation on the Russia-Ukraine border. However, the US warning that an attack could be imminent triggered selling on Wall Street late last week, which has now rippled to Europe.

“As the prospect of a Russian invasion of Ukraine advances, so do the risks of US economic sanctions. These would hit harder than previous rounds of sanctions, and could hurt firms all around the world, not just in Russia,” said Dan Wang, an analyst at Gavekal Research.

Strategists at Rabobank added that "sanctions [on Russia] would have a dramatic impact on energy, food, and key metals prices".

European natural gas contracts for next-month delivery jumped 12 per cent on Monday to €83.41 per megawatt hour. International oil benchmark Brent crude rose as high as $96.16, the highest level in more than seven years, before trimming its gains.

“If western claims of Russian invasion of Ukraine turned out to be unsubstantiated [or] Russia withdrew its troops from its western borders oil prices will come crashing,” said Tamas Varga at PVM Oil Associates, a broker. “But we are getting way ahead of ourselves and for the time being all eyes are on Ukraine and on the $100 (€87) a barrel level.”

B

onds

Bonds of top rated European countries rallied on Monday as traders sought shelter in the lower-risk assets. Germany’s benchmark 10-year Bund yield declined by 0.08 percentage points to just under 0.21 per cent. The equivalent UK gilt yield fell 0.07 percentage points to 1.47 per cent.

Russian and Ukrainian government bonds tumbled when markets reopened on Monday following the fresh warnings of an invasion, hitting their lowest prices of the year.

Ukraine’s dollar debt was hardest hit, with a bond maturing in 2032 down more than 10 per cent in price to trade at 77 cents on the dollar. Russian dollar-denominated bonds were down roughly 2 per cent in price, with the yield on a bond maturing in 2047 rising 0.15 percentage points to 4.93 per cent.

In Asia, Hong Kong’s benchmark Hang Seng fell 1.4 per cent, while Japan’s Topix and South Korea’s Kospi both closed 1.6 per cent lower. – Copyright The Financial Times Ltd.