European shares slide as Ukraine tensions worsen

Volatility Index rises by more than 10%

Downbeat corporate news combined with escalating political tension in Ukraine on Thursday to knock back European stock markets, putting a brake on this month's rally and boosting market volatility.

The pan-European FTSEurofirst 300 index, which rebounded in February to approach its highest level since May 2008, fell one per cent to 1,335.02 points in mid-session trading, adding to a 0.2 per cent dip on Wednesday caused by a drop in luxury goods and financial stocks. Financial stocks took the most points off the FTSEurofirst 300 on Thursday as well, as RBS slumped eight per cent after posting a loss while insurer Allianz fell on the back of difficulties at its Pimco unit.

“We're getting to the tail-end of results season, and many of the results have not been that great. It's also early days in Ukraine, but the situation over there is making people nervous," said Andrea Williams, European equities fund manager at Royal London Asset Management. Problems in Ukraine have highlighted a broader slump in emerging market economies this year, which impacted equity markets in January and has hit the earnings of companies, such as luxury goods groups, exposed to those regions.

On Thursday, armed men seized the regional government headquarters and parliament on Ukraine's Crimea peninsula, a day after Russian President Vladimir Putin ordered military drills in western Russia near the countries' border. The Euro zone's blue-chip Euro STOXX 50 index fell 1.3 per cent. Germany’s DAX, which hit a record high of 9,794.05 points in late January, weakened by 1.5 per cent.

Concerns over the situation in Ukraine caused the Euro STOXX Volatility index to rise 11.1 per cent to 17.93 points - marking its biggest one-day gain in a month.

Equities still preferred asset class
But equities remain the preferred asset class for many investors. The Volatility index is still below its 2014 peak of around 24.60 points, and Michel Juvet - chief investment officer at Swiss bank Bordier - expected an eventual resolution to the problems in Ukraine. JNF Capital investment manager Ed Smyth added he was buying into the DAX at current levels using synthetic exchange-traded funds (ETFs), as he felt the index would soon recover. The FTSEurofirst 300 remains up 1.5 per cent since the start of 2014, adding to a 16 perc ent rise last year. Record low interest rates set by major central banks, designed to boost the global economy after the 2008 financial crisis, have hit returns on cash and bonds and driven many investors over to equities. “If the market has another correction, it would be another reason to buy equities,” said Bordier's Juvet.