By Josie Cox
European markets slipped Monday as tensions between Russia and
the West intensified and the Middle East digested its deadliest day
of fighting between Israelis and Palestinians since the most recent
conflict began.
The Stoxx Europe 600 closed the session 0.5% lower, with losses
extending across all the continent's main bourses. Germany's DAX
lagged with a 1.1% slide. In currency markets, the ruble fell
against both the euro and U.S. dollar, while Russia's Micex and the
dollar-traded RTS Index ended the session down 2.7% and 2.9%
respectively, hitting fresh two-month lows.
In the U.S, stocks pulled back too, with the Dow Jones
Industrial Average declining 0.5% in late European trade at the
beginning of what is one of the busiest weeks of the quarter for
corporate earnings reports.
Over the weekend, the U.S. leveled its most explicit allegations
yet of Russia's involvement in the downing of a Malaysia Airlines
flight last Thursday that left 298 people dead, and subsequent
efforts to conceal evidence.
European leaders threatened broad new sanctions against Moscow,
departing from their initially muted reaction and marking a turning
point in the standoff between the West and the Kremlin.
Also weighing on market sentiment, unrest flared across the
Middle East over the weekend. Israel said 13 soldiers were killed
and Gaza officials said 96 Palestinians were killed on Sunday.
Initially markets showed a muted reaction to the developments
Monday, with strategists at BNP Paribas noting that the tensions
between Russia and the West will likely exert greater pressure on
President Vladimir Putin to adopt a conciliatory approach, but
later the sense of apprehension spread.
Deutsche Bank strategist Jim Reid described the situation as
extremely dangerous and delicate. He added that despite the
understandable conclusion that the market may be reaching, that
diplomacy is the only sensible outcome, the risk of destabilization
cannot be discounted.
"This story still has a long way to run," he said.
Alberto Gallo, a strategist at Royal Bank of Scotland Group,
warned that investors may be putting too much faith in central
banks to rein in tensions and stabilize markets.
"Central banks may manage to overshadow geopolitical tensions
for now and the near future," he wrote in a note, but also said
that emerging market bonds particularly, could become exposed to
significant risks.
On the buy side, Talib Sheikh, a manager of the J.P. Morgan
multi-asset income fund, which is part of a multi-asset platform
with over $25 billion under management, said that volatility was
already edging higher in the wake of this, and that there could be
some forced unwinding of risk-on positioning, if it continued to do
so.
Typical safe-harbor assets such as gold and U.S. government
bonds, having rallied in the direct aftermath of the plane crash,
were trading stronger Monday too.
Gold added 0.3% to hit $1,313.70 an ounce while the 10-year U.S.
Treasury yield stood at 2.46%, down from around 2.57% before the
crash on Thursday. Yields fall as bond prices rise.
UBS economist Paul Donovan said that if tensions in Russia and
Gaza escalate further, energy prices would be the first to react.
Brent crude, however, was trading little changed on the day, at
$107.19 a barrel.
Elsewhere, the corporate earnings season moved into focus
Monday.
Shares in Julius Baer Group AG led the pan-European index,
closing 8.5% higher, after the Swiss bank said that assets under
management rose 8% in the first half of this year and announced
plans to take over Israeli lender Bank Leumi's Swiss private
banking operation.
In the U.K., shares in Tesco PLC advanced 1.3%, after the U.K.'s
biggest retailer said Chief Executive Philip Clarke would leave the
company in October to be replaced by Unilever executive Dave Lewis.
That news offset the company's latest profit warning.
Finally, Dutch electronics heavyweight Philips NV on Monday
reported a 23% fall in net profit due in part to unfavorable
exchange rates. It did try to pacify investors, though, stating
that earnings should improve in the second half of the year, driven
by cost savings and higher sales, particularly at its health care
division. Shares in the group closed down 1.1%.
Corrections & Amplifications
Russia's Micex index closed Monday down 2.7%. An earlier version
of this article said it closed down 3.6%. (July 21, 2014)
Write to Josie Cox at josie.cox@wsj.com