Stocks sink, havens sought as Russia worries combine with Fed jitters

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By Kevin Buckland

TOKYO (Reuters) – Stock markets fell and havens including U.S. Treasuries and the Japanese yen saw demand as Russian President Vladimir Putin’s announcement of a partial military mobilisation hurt sentiment in a market already jittery about aggressive Federal Reserve policy tightening.

European equity markets were set to fall at the open with EuroStoxx50 futures dropping as much as 1% to their lowest level since mid-July.

U.S. emini stock futures pointed 0.11% lower, following a sell-off on Wall Street overnight that already knocked 1.13% off the S&P 500.

European currencies tumbled, with the euro dropping 0.65% to $0.9903 and sterling sliding 0.38% to $1.1338 after touching a new 37-year low at $1.1304.

The dollar index, which measures the currency against six major peers, rallied 0.61% to 110.84, and marking a new two-decade high at 110.87.

The dollar was slightly weaker against fellow safe-haven currency the yen, though, at 143.615.

“The Russia headlines have the euro and sterling selling off hard, while the dollar is stronger against those European currencies, but the yen is even stronger, so those are typical safe-haven-type flows,” said Shinichiro Kadota, a senior FX strategist at Barclays in Tokyo.

Putin said he had signed a decree on partial mobilisation beginning on Wednesday, saying he was defending Russian territories and that the West wanted to destroy the country.

Equities had already been week due to nervousness about more monetary tightening when the Fed decides policy later on Wednesday.

MSCI’s broadest index of Asia-Pacific shares was down 1.37%.

Japan’s Nikkei fell 1.36% and touched a two-week low, while Australia’s benchmark share index slid 1.56%.

Chinese blue chips declined 0.71%, while Hong Kong’s Hang Seng lost 1.48%.

“Markets are vulnerable,” said Frank Benzimra, head of Asia equity strategy at Societe Generale.

“It’s going to be a tough time for equities and risk assets as long as you aren’t seeing any kind of (dovish) pivot from the Fed.”

The Fed headlines a week in which more than a dozen central banks announce policy decisions, including the Bank of Japan and Bank of England on Thursday.

Sweden’s Riksbank surprised markets overnight with a full percentage-point hike, and warned of more to come over the next six months.

Despite that, bets for Fed tightening stayed stable.

Markets are pricing in an 83% chance of another 75-basis-point increase, and see a 17% probability of a full percentage point rise.

Global yields had risen amid expectations of further tightening, but were suppressed by demand for the safety of debt following Putin’s comments.

The two-year U.S. Treasury yield hit an almost 15-year high at 3.992% on Tuesday, and was last at 3.9440%.

The 10-year Treasury yield touched 3.604% on Tuesday for the first time since April 2011 before retreating to 3.5338%.

Australia’s benchmark 10-year yield rose to an almost three-month high of 3.789%, before pulling back to 3.690%.

(Reporting by Kevin Buckland; Editing by Ana Nicolaci da Costa and Kim Coghill)