Asia stocks fall on Ukraine fears as oil surges to 7-year highs

The nervous mood brought about by warnings that Russia could invade Ukraine at any time sent Japan's Nikkei tumbling 2.6 per cent. PHOTO: AFP

SYDNEY (REUTERS) - Asian shares fell on Monday (Feb 14) as warnings that Russia could invade Ukraine at any time sent oil prices to seven-year peaks, boosted safe-haven bonds and belted the euro.

The United States on Sunday said Russia might create a surprise pretext for an attack as it reaffirmed a pledge to defend "every inch" of Nato territory.

The nervous mood sent Japan's Nikkei tumbling 2.1 per cent. South Korea's Kospi fell 1.2 per cent, but Australia's S&P/ASX 200 Index added 0.4 per cent

Hong Kong's Hang Seng Index lost 1.3 per cent, while the Shanghai Composite Index dropped 0.9 per cent.

Singapore's Straits Times Index reversed a small drop earlier to edge up 0.1 per cent at 1.35pm.

Eurostoxx 50 futures shed 1.6 per cent and FTSE futures 0.5 per cent. S&P 500 futures edged up 0.3 per cent and Nasdaq futures 0.2 per cent after steep losses on Friday..

Markets have been in convulsions since an alarmingly high US inflation reading sparked speculation the Federal Reserve might raise rates by a full 50 basis points in March.

There was even chatter about an emergency inter-meeting hike. That was spurred in part by the timing of a closed Fed Board meeting for Monday, though the event seemed routine.

The talk was tamped down when the Fed released an unchanged bond buying schedule for the coming month, since the US central bank has said it would hike only after its buying had ceased.

San Francisco Fed President Mary Daly also played down the need for a half-point move in an interview on Sunday, saying being too "abrupt and aggressive" on policy could be counter-productive.

Futures markets since have scaled back the risk of a half-point rise to around 40 per cent, when it had been priced as a near certainty at one stage last week.

Attention will now be on an appearance by St Louis Fed President James Bullard later on Monday, given that he recently called for 100 basis points of tightening by June.

All the rate chatter sent Treasury yields to peaks last seen in 2019, before geopolitical tensions prompted a safe-haven rally late on Friday. Yields on 10-year notes were last at 1.96 per cent, having been as high as 2.06 per cent last week.

Oil prices on Monday hit their highest in more than seven years on fears that a possible invasion of Ukraine by Russia could trigger US and European sanctions that would disrupt exports from the world's top producer in an already tight market.

Brent crude futures was at US$95.56 a barrel by 0235 GMT, up US$1.12, or 1.2 per cent, after earlier hitting a peak of US$96.16, the highest since October 2014.

US West Texas Intermediate crude rose US$1.28, or 1.4 per cent, to US$94.38 a barrel, hovering near a session-high of US$94.94, the loftiest since September 2014.

"If... troop movement happens, Brent crude won't have any trouble rallying above the US$100 level," Oanda analyst Edward Moya said in a note. "Oil prices will remain extremely volatile and sensitive to incremental updates regarding the Ukraine situation."

The tensions come as the Organisation of the Petroleum Exporting Countries (Opec) and its allies, a group known as Opec+, struggle to ramp up output despite monthly pledges to increase production by 400,000 barrels per day (bpd) until March.

The International Energy Agency said the gap between Opec+ output and its target widened to 900,000 bpd in January, while JP Morgan said the gap for Opec alone was at 1.2 million bpd.

"We note signs of strain across the group: Seven members of Opec-10 failed to meet quota increases in the month, with the largest shortfall exhibited by Iraq," JP Morgan analysts said in a Feb 11 note.

The bank added that a super-cycle is in full swing with "oil prices likely to overshoot to US$125 a barrel on widening spare capacity risk premium".

Investors are also watching talks between the US and Iran to revive the 2015 nuclear deal.

However, a senior Iranian security official said on Monday that progress in talks was becoming "more difficult".

The risk of war in Ukraine also saw the euro retreat to US$1.1360, from last week's top of US$1.1495. The safe-haven yen regained some ground to leave the dollar at 115.50 yen, from a peak of 116.33.

The Bank of Japan will conduct an unlimited bond buying offer on Monday to restrain yields there.

The drop in the euro lifted the US dollar index up to 96.035 and away from last week's trough of 95.172. The dollar was also up at 77.26 roubles, after jumping 2.9 per cent on Friday.

Gold was holding gains at US$1,859 an ounce, after climbing 1.6 per cent on Friday.

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