Stocks fall as Ukraine war escalation unsettles markets

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Stocks fell and government bonds gained on Tuesday, as investors responded to the latest escalation of the war in Ukraine.

The pan-continental Stoxx Europe 600 index was 1.1 per cent lower by early afternoon trading. Germany’s Dax was down 1.5 per cent and France’s Cac 40 fell 1.6 per cent.

Declines were more muted on Wall Street, with the S&P 500 0.5 per cent lower in early trading.

The moves came after Ukraine struck a military target inside Russia with US-made long-range missiles for the first time since the Biden administration lifted restrictions on their use. Further unnerving investors on Tuesday, Russian President Vladimir Putin signed a decree lowering the potential threshold for the use of nuclear weapons.

“This is classic risk-off where people are flying to safety,” said Emmanuel Cau, head of European equity strategy at Barclays. “It is very much about [escalation] worries.”

Sectors such as retail and banking, which are sensitive to concerns about the economy, were a drag on European indices. However, defence stocks rose; shares in Saab of Sweden and Rheinmetall of Germany were up more than 2 and 3 per cent respectively.

In bond markets, the yield on benchmark 10-year US Treasuries fell 0.04 percentage points to 4.37 per cent while German yields also declined. Yields fall when prices rise.

The Japanese yen — which tends to rise at times of heightened tension in markets — climbed 0.5 per cent against the US dollar.

US stock markets rallied in the wake of the US presidential election earlier this month, while European shares have fallen as investors bet that president-elect Donald Trump’s plans for tariffs will hurt the European economy.

Andrew Pease, global head of investment strategy at Russell Investments, said the renewed Ukraine worries had “added to the sense of geopolitical unease ahead of the Trump transition”.

Gold was up 0.7 per cent to $2,629 per troy ounce, regaining some ground lost in a sell-off this month.