Investors tensions over fighting in Iraq and Ukraine saw a global shift into traditional safe-haven currencies, precious metals and bonds on Monday, and oil hovered near a nine-month high.
The mood also spread to share markets. The Nikkei in Tokyo saw its biggest fall in a month and European bourses started 0.2 per cent in the red having just about held on for a ninth week of back-to-back gains on Friday.
Worries about Iraq were intensifying after Sunni insurgents from the Islamic State of Iraq and the Levant (ISIL) seized a mainly ethnic Turkmen city in the northwest of the country over the weekend.
It continued to drive fears about widespread turmoil in the country and region. Iraq is oil cartel OPEC’s second largest producer and Brent was up 0.5 per cent to $113.02 per barrel as trading in London gathered pace, although it was some distance from Friday’s nine-month high of $114.69.
“It looks like the country is headed to civil war, which will mean a higher risk premium built into oil prices,” said Tony Nunan, oil risk manager at Mitsubishi Corp.
The rising oil prices and shrinking risk appetite weighed on emerging Asian currencies particularly, with the rupee hitting a five-week low and the rupiah and the South Korean won also withering.
It was a boon for safe-havens though. Among the major currencies the yen and Swiss franc rose , while gold hit its highest in nearly three weeks at $1,277.80 an ounce.
Iraq wasn’t the only source of concern either. Hopes of Ukraine coming off the boil were dashed after pro-Russian separatists shot down a Ukrainian army transport plane, killing all 49 military personnel on board.
On top of that, Russian gas exporter Gazprom said on Monday that Ukraine had failed to pay at least part of its gas debts and would now have to pay up front for deliveries, suggesting that supplies could be cut.
Russian shares fell sharply, with the dollar-denominated RTS index down 2.5 per cent and Gazprom down 2.0 per cent at 143.47 roubles.
The dollar slipped about 0.3 per cent to 101.76 yen, moving back toward a two-week low of 101.60 yen marked on Thursday. Against the euro it added about 0.1 per cent on the day to $1.3551.
Top-rated euro zone bonds pushed higher as concerns over the escalating geopolitical tensions supported safe-haven government debt though gains were limited ahead of the U.S. Federal Reserve’s policy meeting this week.
The meeting concludes on Wednesday. It is expected to press on with its stimulus withdrawal plans and markets will be watching for any signals on when the U.S. central bank might begin hiking interest rates.
“Key points are if Fed Chair (Janet) Yellen upgrades her view on the economic view in light of recent economic indicators and if the central bank raises its yield forecast,” said Junichi Ishikawa, market strategist at IG Securities in Tokyo.
Other data in focus this week is China’s latest report on foreign direct investment on Tuesday, and then house price figures on Wednesday.
Investors would be concerned if the latter were to show a slowdown in property price growth, raising questions about the outlook for that sector especially given the broader weakness in the economy.
China’s Shanghai Composite Index added 0.7 per cent on Monday, helped by some publicly listed Chinese banks qualifying for a reduction in reserve requirements announced by the central bank last week, according to bankers.
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