By Josie Cox
The Russian ruble hit a fresh record low against the dollar
Monday, burdened by continued fighting in Ukraine over the weekend
and European Commission President José Manuel Barroso's warning
that the situation was approaching "a point of no return."
The dollar rose by 1.2% to 37.50 against the ruble in early
trade, surpassing a previous record set Friday. By the end of the
day, some of that move had been retraced, but year-to-date the
ruble is still down more than 12% against the greenback.
Neil Mellor, a currency strategist at BNY Mellon, said the
market had been somewhat complacent during parts of last month, but
that recent developments have reignited investor fears. "The ruble
is in free fall, which is a source of serious concern," he
said.
In equities, Moscow's Micex closed the session 0.5% lower while
the dollar-traded RTS declined by 1%, taking the former's losses to
3.5% since last Monday and the latter's to almost 7%.
On Sunday, Ukrainian government forces lost more ground to
Russian-backed separatists in heavy fighting in the east of the
country. On Saturday, European leaders threatened to impose more
sanctions on Moscow if it doesn't end its support for the
rebels.
"While guns are firing there is no way one could expect the
market situation to normalize," said Igor Akinshin, a dealer at
Alfa Bank in Moscow. "The peak hasn't passed yet."
Egor Fedorov, an analyst at ING Bank in Moscow added that
pressure was also being heaped on the ruble by reports the U.K. has
proposed banning Russian banks from the SWIFT network.
"That could result in short-term disruptions in interbank
payments and security settlements," Mr. Fedorov said.
European stocks largely lacked direction Monday, as investors
attempted to gauge the implications of geopolitical tensions as
well as data showing that manufacturing activity in the euro zone
slowed even more sharply than first estimated in August, due in
part to a weaker performance than first forecast from Germany.
The Stoxx Europe 600 added 0.25% on the day, while U.K's FTSE
and Germany's DAX gained 0.1%. France's CAC was unchanged at close.
The S&P 500 was trading flat on the day too, a whisker above
the 2,000 mark.
In debt markets, a bid for core-European debt perceived to be
safe during times of stress sent yields on two-year French
government bonds into negative territory for the first time ever.
Other countries where yields on short-term bonds are negative
include Germany, Holland, Austria, Finland and Belgium.
The euro continued its slow slide against the greenback,
touching a near-year low of $1.3119, before recovering slightly,
ahead of rate announcements from both the European Central Bank and
the Bank of England later in the week.
Several banks, including BNP Paribas, RBC and Nomura, expect the
ECB to trim interest rates in a further bid to fuel the sluggish
recovery, highlighted anew with Monday's PMI data.
Last month, ECB President Mario Draghi hinted that the central
bank could be preparing further stimulus, even raising the prospect
of quantitative easing. Some economists have since said, however,
that the ECB is likely to want to gauge the impact of its June
measures and assess the take-up of the targeted longer-term
refinancing operation before taking further action.
Back in equity markets Swiss drug maker Novartis AG led the
pan-European index, adding more than 4% after a positive testing of
its LCZ696 heart drug. Fabian Wenner, an analyst at Kepler
Cheuvreux, raised his target price to 87 Swiss francs from 81
francs.
France's Iliad SA, which is trying to buy U.S. operator
T-Mobile, was the biggest loser on the index, tumbling 8.8% after
reporting a fall in first-half net profit on Friday.
In commodities markets Brent crude oil lost 0.5% to trade at
$102.66 a barrel, while gold added 0.1% to $1,288.0.
-- Andrey Ostroukh in Moscow contributed to this article
Write to Josie Cox at josie.cox@wsj.com