European stocks drop as Ukraine crisis flares up

The Bank said that the global economy should grow at just 2.4 percent this year
The Bank said that the global economy should grow at just 2.4 percent this year (AFP Photo/Daniel Roland)

London (AFP) - European stock markets sank on Thursday as claims of Russian troops actively fighting in east Ukraine raised fears of an outright military confrontation between Kiev and its former Soviet master.

In London the benchmark FTSE 100 index dropped 0.36 percent to 6,805.80 points and the Paris CAC 40 lost 0.66 percent to 4,366.04 compared with Wednesday's close.

Frankfurt's DAX 30 index shed 1.12 percent to 9,462.56 points, hit also as data showed German unemployment rose by 2,000 in August, dashing expectations for a decline of about 5,000.

"The stand-off between Russia and Ukraine has flared up once again with reports coming out of Kiev suggesting fresh military incursions across the border," said analyst Tony Cross at trading firm Trustnet Direct.

The Russian ruble sank to a five-month low of 36.75 against the dollar, and Russian financial stocks plunged on fears of the West unleashing new sanctions.

The price of gold -- widely considered a safe-haven investment -- rose on the London Bullion market to $1,292.0 an ounce compared with $1,282.52 an ounce on Wednesday.

- West mulls new Russia sanctions -

The United States accused Russia on Thursday of being "directly involved" in fighting in conflict-hit east Ukraine, after rebels appeared to seize swathes of territory from retreating government forces.

Moscow insists none of its soldiers were on Ukrainian soil.

"Keeping recent bullish sentiment in check is the blatant Russian-led offensive in Ukraine," added Capital Spreads analyst Jonathan Sudaria.

Berenberg bank analyst Christian Schulz said the latest Russian manoeuvres suggest that "we might even be edging closer towards our worst case scenario of a full-scale Russian invasion".

"In response, Ukraine is likely to step up its military campaign, leading to a further escalation, which would probably trigger another sharp tightening of Western sanctions and Russian countersanctions," he said.

German Chancellor Angela Merkel said a Saturday summit of EU leaders will discuss new sanctions while Washington also warned that it was considering new penalties.

Meanwhile Germany's federal statistics office Destatis said inflation in August stood just 0.8 percent year-on-year, unchanged from July.

The preliminary flash estimate came after France announced unemployment rate had hit a record high last month.

Analysts said the statistics from the eurozone's two largest economies had also weighed on investors' minds.

"Things seem to be going from bad to worse for the eurozone and as it stands, we’re seeing no signs that this is going to change," said Craig Erlam, market analyst at brokers Alpari.

"There are a lot of things to be worried about at the moment and it appears, very few things to be optimistic about."

European stock markets had traded mixed on Wednesday, as investors paused after recent gains won on hopes of quantitative easing stimulus measures from the European Central bank.

In foreign exchange activity on Thursday, the European single currency fell to $1.3181 from $1.3195 late in New York on Wednesday.

The euro eased to 79.51 pence from 79.59 pence late in New York on Wednesday, while the pound rose to $1.6578 from $1.6576.

"The euro gave up all of this morning’s gains as investors pulled out of the currency for fears of further intervention and sanctions against Russia," said Kash Kamal, analyst at Sucden Research.

- Asia mixed before data -

Asia's markets mostly fell on Thursday, with investors unable to build on recent advances on the eve of key US second-quarter economic growth data.

Tokyo fell 0.48 percent, Sydney lost 0.47 percent, Shanghai gave up 0.62 percent and Hong Kong lost 0.71 percent, while Seoul finished on a flat note.

Global markets are however on a general uptrend as the US economy shows regular signs of getting back on track, in turn sending New York stocks to record highs.

On Thursday, US stocks opened sharply lower as Ukraine crisis worries surged, offsetting upbeat encouraging US economic growth and unemployment data.

By early-afternoon on Wall Street, Dow Jones Industrial Average had slid 0.21 percent to 17,086.26, while the tech-rich Nasdaq Composite dropped 0.14 percent to 4,563.23.

The broad-market S&P 500 pulled back from Wednesday's record close, shedding 0.11 percent at 1,997.98.