Ukraine crisis: fear of escalation roils markets

Fears that the crisis in Ukraine is escalating into a new and dangerous phase roiled financial markets Wednesday.

Following allegations of a buildup of Russian troops on the border of Ukraine and the prospect of tit-for-tat sanctions between the West and Moscow, investors have become increasingly vexed by the situation in Ukraine.

• Sanctions against Russia in phase 3, but is Vladimir Putin listening?
• Russia-U.S. relations are chilly, but is this another Cold War?

The latest jitters, which contributed to a 1.1 per cent fall in Japan's Nikkei 225 stock average earlier and a 1.2 per cent decline in the Stoxx 50 index of leading European shares, have come in the wake of comments from Polish Prime Minister Donald Tusk that he has information indicating that there is a growing threat of a "direct intervention" by Russia in Ukraine.

Tusk's comments come a day after John Ging, director of United Nationshumanitarian operations, warned the Security Council at an emergency meeting requested by Russia that the humanitarian situation in eastern Ukraine is steadily worsening as power and water supplies are scarce, homes are destroyed and health workers flee.

North American markets up

The fear in the markets is that Russia may use these reports of a humanitarian crisis to justify a military incursion, which would clearly ratchet up tensions with the West.

"This is the biggest fear for investors right now and explains why we're seeing more risk aversion in the markets today," said Craig Erlam, market analyst at Alpari.

In Toronto, theS&P/TSX composite index ended the day up 14 points to 15,202, supported by the gold sector as nervous investors sent bullion prices higher. The index dipped in the morning on geopolitical tensions, but was buoyed by strong earnings from Tim Hortons.

Despite the risk-off sentiment, the Canadian dollar was up 0.36 of a cent to 91.63 cents US as Statistics Canada reported that the country's trade surplus shot up to $1.9 billion in June from a revised $576 million in May

U.S. stocks closed slightly higher, led by a rebound in consumer staples stocks.The market had fallen to its lowest level since May a day earlier, when Russia massed troops near its border with Ukraine.

The Dow Jones industrial average rose 14 points, or 0.1 per cent, to close at 16,443 Wednesday.The Standard-and-Poor's 500 index rose a fraction to end at 1,920.The Nasdaq composite rose two points, or 0.1 per cent, to 4,355.

Sanctions against Russia also a concern

However realistic these concerns are, investors also fear that the sanctions imposed on Russia by the European Union and the United States could impact economically on both sides.

Europe stands to lose the most from any escalation given its big trading relationship with Russia. Already, European businesses that have ties with Russia's financial, military and energy sectors stand to lose out from the sanctions.

Even those that don't have direct links to those sanctioned sectors are cautioning over the outlook. German sportswear company Adidas, for example, recently expressed worries over the impact on its business.

So far, European companies appear to be bearing up, though analysts fear it won't take much of an increase in tensions between the West and Russia to start crimping the recovery.

"Loss of export revenues is the most obvious channel, but there may also be damage to business confidence given the heightened uncertainty," James Ashley, chief European economist at RBC Markets.

Russia already appears to be preparing retaliatory sanctions against the EU. On Tuesday, there was widespread speculation that Moscow was preparing measures to close the airspace over Siberia to European flights heading to Asia.