By Josie Cox
European shares reversed earlier losses Tuesday, shrugging off
fears surrounding the potential implications of additional
sanctions on the Russian economy, even though jitters earlier in
the session had spurred a wave of demand for safe-harbor
assets.
By midafternoon, the Stoxx Europe 600 was 0.6% higher, buoyed by
indexes in Germany, France and the U.K all rising between 0.6% and
0.9%, with traders citing some solid corporate earnings reports
coupled with upbeat U.S. consumer sentiment data.
Earlier in the session, a lack of transparency on the breadth
and severity of U.S. sanctions had weighed on equities and sent
investors clambering for safe-harbor assets.
The yield on the 10-year German Bund fell to a record low of
1.122%, surpassing levels seen even in the depths of the euro
crisis, while gold added sharply to trade at $1,311.20 a troy
ounce. Yields fall when prices rise.
Despite some relief later in the day, the Russian ruble remained
under pressure, falling 0.4% against the U.S. dollar, to 35.71--its
lowest level since May.
It now costs an average of $235,000 a year to insure $10 million
of Russian debt for five years, roughly $9,000 more than on Monday,
according to Markit.
"It is always the case with markets that uncertainty drives
volatility and that is exactly what is happening here," said Peter
Dixon, an economist at Commerzbank in London.
Philip Shaw, chief economist of Investec Bank PLC, said that
while the idea of sanctions isn't new, investors are becoming
unnerved by the simple intensification of conflict between the West
and Russia, signaled by the sanctions but also by reports of
increased Russian troop movement.
The burst of early nerves Tuesday followed news that U.S.
President Barack Obama and European leaders agreed late Monday to
adopt new sanctions this week against critical sectors of Russia's
economy. The White House also warned that Moscow is amassing troops
along the border in possible preparation for a further incursion in
Ukraine.
"The news is ever-depressing," said Kit Juckes, a macro
strategist at Société Générale, pointing also to the conflict in
Gaza. "While there is little further contagion so far, we have a
weaker rand and weaker Turkish lira this morning. The right
approach all year has been to buy into geopolitically inspired
softness in emerging markets, at least in countries not directly
implicated, but a thin summer market can be a bit more
jittery."
For Bunds, support is stemming from a concerns that European
sanctions against Russia could pinch economies in Germany and other
pockets of the euro zone.
"There is a definitely risk of a blowback into the European
economy [from Russian sanctions] and that is why Bunds are
rallying," said Alastair Thomas, head of rates and treasury
management at ECM Asset Management.
"If sanctions are particularly tough, they could pose a risk to
growth in the region and that in turn could provide more impetus
for the ECB to engage in quantitative easing later in the year,"
added Mr. Thomas.
"Investors are fairly confident there would be European Central
Bank policy response, which could take them down the quantitative
easing route" Lyn Graham-Taylor, interest-rate strategist at
Rabobank, agreed.
Like broader European markets, however, Russia's indexes proved
broadly resilient, with the Micex adding 0.5%. The dollar-traded
RTS remained 0.2%, in the red having recouped some earlier
losses.
-- Stacy Meichtry, Carol E. Lee, Tommy Stubbington and Ben
Edwards contributed to this article.
Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at
tommy.stubbington@wsj.com