Asian stocks draw back and bond yields drop on reported firing in Ukraine

By Kevin Buckland and Selena Li

TOKYO (Reuters) - Asian stock markets retreated on Thursday after Russian media reported that rebels in eastern Ukraine had accused Kyiv government forces of using mortars to attack their territory.

U.S. and European equities futures also fell, while traders sought safety in government bonds and oil clawed back some of its heavy early losses.

Russian-backed separatists in eastern Ukraine accused government forces on Thursday of opening fire on their territory four times in the last 24 hours and said they were trying to establish if anyone had been hurt or killed.

The report comes as Russia has massed more than 100,000 troops close to Ukraine's borders, raising fears of an invasion.

Initial fears of a cross-border flare up were soothed a little by details suggesting the incident occurred within the contested area of Donbass, said Westpac analyst Sean Callow.

"But markets are clearly on edge," he added, and vulnerable since a lot of traders had assumed tension was ebbing.

"The price action tells you that this is the weak side of the market," he added.

The yield on 10-year U.S. Treasury notes fell 7 basis points (bps) and was last at 1.967%, with the 2-year yield falling 4.7 bps to 1.4798%.

MSCI's broadest index of Asia-Pacific shares lost 0.09%, reversing morning gains, with Japan's Nikkei falling 0.77%.

Investors also pulled back from Hong Kong stocks with the Hang Seng Index dropping 0.37%.

MSCI's equivalent regional index excluding Japan rose slightly by 0.02%, backed by China and Korean stocks.

Chinese blue chips added 0.36%, and Australia's benchmark rose 0.16% as higher metals prices outweighed geopolitical concerns. South Korea's Kospi leapt 1.21%.

U.S. and European markets looked set for weaker opens, with S&P 500 futures falling 0.43% and Britain's FTSE Index futures down 0.29%.

Crude oil pared some losses after earlier tumbling more than 2% on optimism that negotiations will salvage Iran's 2015 nuclear deal and bring more supply to a tight market.

By afternoon, U.S. West Texas Intermediate (WTI) crude was down $1.59 at $92.07 a barrel, while Brent slid $1.63 to $93.18 a barrel.

"The fear is that Russia-Ukraine risks may become entrenched, maybe even normalized," analysts at Mizuho wrote in a research note.

At the same time, worries about a super-hawkish Fed rate-tightening campaign, potentially including a 50 basis-point hike next month, took a step down overnight after minutes of the latest policy meeting signaled a more measured, data-dependent approach from central bank officials.

A softer dollar and lower yields combined with subdued risk sentiment helped to keep gold near an eight-month peak at $1873.57. It last traded around $1,868 an ounce.

 

(Editing by Kim Coghill)