European stocks drop as Russia-Ukraine tensions escalate

By Sruthi Shankar and Shashank Nayar

(Reuters) -European shares fell on Thursday as heightened Russia-Ukraine tensions eclipsed a slew of encouraging earnings from companies such as Kering, Reckitt Benckiser and Commerzbank.

The pan-European STOXX 600 index fell 0.7% with banking and energy shares leading declines as oil prices dropped and benchmark European bond yields slipped for the second consecutive session as investors sought shelter in the safety of bonds.

There was also a fall in yields on the German 10-year government bond, the go-to safe-haven asset in the euro zone.

U.S. President Joe Biden said on Thursday there was now every indication Russia was planning to invade Ukraine, including signs Moscow was carrying out a false flag operation to justify it, after Ukrainian forces and pro-Moscow rebels traded fire. nL1N2US0M8

The Kremlin accused Biden of stoking tension and released a strongly worded letter which accused Washington of ignoring its security demands and threatened unspecified “military-technical measures”. Moscow also ejected the number two official from the U.S. embassy.

“We believe the market is underappreciating the potential risks that are out there,” Elwin de Groot, senior market economist at Rabobank, said.

“If you look at commodity markets in recent weeks, there’s huge volatility and prices increases, especially in the energy complex. That raises the potential for more nasty inflation surprises in the coming months.”

Travel stocks were the top losing European sub-index, down 1.7%, over fears that the potential conflict could derail the recovery of the sector, especially of airline stocks.

France’s CAC 40 slipped 0.3%, the least among its European peers, boosted by a 5% jump in luxury goods maker Kering after it reported sharp growth in quarterly sales on the back of its top Gucci brand. Peer Hermes added 1.1%

Key volatility gauges in markets have jumped in recent weeks as fears grow of a war between Russia and Ukraine. While Moscow has denied it would invade its neighbour, the West has threatened Russia with harsh economic sanctions.

Concerns about surging inflation and rising interest rates have also knocked risk appetite, with traders ramping up bets for aggressive policy tightening from the U.S. Federal Reserve.

However, there has been some respite as 65% of the nearly half of STOXX 600 companies reporting earnings have beaten analysts’ profit estimates, as per Refinitiv data.

Among quarterly earnings, Britain’s Reckitt Benckiser Group rose 5.9% after it beat fourth-quarter sales forecasts.

Commerzbank added 3.2% after the German lender swung to a better-than-expected fourth quarter and painted a rosy outlook for 2022.

Airbus slipped 1.3% after it predicted higher profit and deliveries for 2022 but cautioned that supply chain tensions and a spike in inflation remained challenges for now.

Continental jumped 3.3% after Manager Magazin reported the German auto parts supplier is considering splitting into four separate businesses.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips, Ramakrishnan M. and Andrew Heavens)