MW: European stocks drop in volatile trade; ruble sinks
LONDON (MarketWatch) — European stocks dropped Tuesday, with investors ditching so-called risk assets as oil prices continued to sink amid a spectacular collapse of Russia’s ruble against the U.S. dollar.
The Stoxx Europe 600 SXXP, -0.78% fell 1.3% to 319.16, on pace for its lowest close in two months, with banks, energy and consumer goods shares under pressure.
The pan-European index had opened with gains and pushed to session highs after a better-than-expected reading of business activity in the struggling eurozone. Markit’s December composite purchasing managers index rose to 51.7, growing at the fastest pace in two months.
The pace of expansion was still one of weakest seen in 2014, which should keep pressure on the European Central Bank to enact further easing measures, as it tries to encourage economic growth and reinvigorate inflation levels.
But the relentless slide in the ruble and a renewed selloff in the oil market took center stage.
The ruble had jumped after Russia’s central bank pushed its key interest rate to 17% from 10.5%, a stunningly strong hike aimed at halting the ruble’s recent decline. But the rally proved short-lived, and the dollar USDRUB, +10.51% surged to buy as much as 78 rubles, compared with around 59 rubles early Tuesday. The dollar recently pared the gain to 73.27 rubles.
There are fears that Russia may enact capital controls, said analysts at Brown Brothers Harriman, who also noted that the price of insurance via five-year credit default swaps is at its highest since 2009.
When domestic capital flight is the problem, the rise in Russian interest rates “might only make things worse by spreading the pain to domestic borrowers and causing the economy to contract,” said Marshall Gittler, head of global FX strategy, in a note.
Oil prices hitting a bottom and some resolution of tensions with the West over Ukraine “are necessary before capital will be attracted back into the country,” he said. “Unfortunately, both those targets remain far away.”
Brent crude-oil futures LCOF5, -3.34% dropped more than 3% Tuesday, trading below $59 a barrel for the first time since mid-2009. Futures for West Texas Intermediate crude oil CLF5, -3.24% also lost more than 3%, falling below 54 a barrel.
Russia’s Micex index had fallen more than 7% during the session, but recently swung higher for a mid-afternoon gain of 3%.
On the major country indexes, Germany’s DAX 30 DAX, -0.35% fell 0.3%, France’s CAC 40 PX1, -1.10% dropped 1.6% and the U.K.’s FTSE 100 UKX, +0.09% lost 0.3%, with each also swinging between gains and losses during the session.
