Ukraine tensions land fresh blow on struggling world stocks

By Marc Jones

LONDON (Reuters) - There was no let-up for bruised share markets on Monday as growing fears of a military conflict in Ukraine followed last week's heavy sell-off on Wall Street, Tokyo and major European exchanges.

Towns in eastern Ukraine faced the threat of military action from government forces after Kiev gave pro-Russian separatists a 9 a.m. (0600 GMT) deadline to disarm and end their occupation of state buildings or face a major "anti-terrorist" operation.

As the deadline passed, a Reuters reporter in the flashpoint city of Slaviansk, where armed men had seized two government buildings, said there was no outward sign the rebels were complying with the ultimatum.

For financial markets it was yet more uncertainty. Asian markets had continued to concede ground overnight and Europe followed suit with the pan-regional FTSEurofirst 300 down 0.5 percent in morning trading.

A flurry of M&A activity, including a $6 billion copper mine sale from Glencore Xstrata, helped cushion the falls, which were driven by a 0.7 percent decline in the Dax. German-listed firms have some of the biggest links to Russia.

"The escalation sharply increases risks of an all-out civil war in Ukraine," said Bank of America Merrill Lynch analysts in a research note.

"Even though it is still not our baseline scenario, the entire development is clearly negative for the market (and raises) renewed fears of another wave of sanctions from the West."

Russian markets tumbled. The rouble and Moscow's main stock market were down around 1 and 1.5 percent, while the country's key bonds stayed under pressure as the cost of insurance against default increased.

European Union foreign ministers will hold talks later on Monday about tougher sanctions against Russia. The worry for many is that the two sides end up imposing increasingly tough measures that will inevitably harms both.

PLAYING SAFE

The low-yielding yen benefited from the heightened risk aversion. The dollar was nudged down to 101.66 yen, after touching a 3-1/2-week low of 101.32 yen on Friday, far from the 2-1/2-month high of 104.13 yen set on April 4.

The euro retreated to $1.3825 after tough talk from the European Central Bank over the weekend that it will take action to head off further gains in the currency.

"The strengthening of the exchange rate would require further monetary policy accommodation," ECB head Mario Draghi said at a meeting of the International Monetary Fund.

"If you want policy to remain as accommodative as now, a further strengthening of the exchange rate would require further stimulus," he added, as one of his closest colleagues also laid out some contours for a possible asset buying programme.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had shed 0.5 percent, pulling further away from five-month highs hit on Thursday.

Japan's Nikkei stock average ended down 0.4 percent at a fresh six-month closing low. It plunged 7.3 percent last week, its biggest weekly fall since the devastating earthquake and tsunami in March 2011.

BULLISH BUNDS

S&P 500 e-mini futures pointed to a subdued start for Wall Street later. Last week's turbulence had hit global markets and saw the tech and biostock-dominated Nasdaq take its biggest tumble since 2012 as it fell over 3 percent.

"Some are worried that a U.S. bubble in the equities markets might be corrected, because of the ongoing tapering" of monetary stimulus by the U.S. Federal Reserve, said Kyoya Okazawa, head of global equities at BNP Paribas in Tokyo.

Among commodities, spot gold benefited from the move towards safe-haven assets, adding about 0.6 percent to $1,327.10 an ounce, after earlier marking a new three-week high.

U.S. crude for May delivery added 0.6 percent to $104.42 per barrel and Brent crude rose 0.8 percent to $108.21, bolstered by fears that the Ukraine situation could escalate. Ukraine is a major supply route for Russian gas to Europe.

In Europe, German government bonds were the big beneficiaries of the geopolitical uncertainty, also responding to Draghi's comments. Bund yields dipped to a 10-month low, while most periphery euro zone bonds also made ground.

"It's a pretty bullish day for core (bonds)," said Lyn Graham-Taylor, rate strategist at Rabobank. "The overall message was that the ECB doesn't know what QE (quantitative easing) would look like, but they see it as a viable policy option."

(Additional reporting by Marius Zaharia in London and Megan Davies in Moscow; Editing by John Stonestreet)