By Josie Cox and Tommy Stubbington
European shares reversed earlier losses Tuesday, largely
shrugging off fears surrounding the potential implications of
additional sanctions on the Russian economy, even though jitters
earlier in the session had spurred a wave of demand for safe-harbor
assets.
The Stoxx Europe 600 closed 0.3% higher, with traders citing
some solid corporate earnings reports coupled with upbeat U.S.
consumer sentiment data.
U.K. engineer GKN PLC was among the top risers after reporting
an increase in first-half profit even as sales took a hit from the
strength of the pound.
Earlier in the session, nerves over a potential escalation of
sanctions against Russia had weighed on equities and sent investors
clambering for safe-harbor assets.
The yield on the 10-year German Bund fell to a record low of
1.11%, surpassing levels seen even in the depths of the euro
crisis. Yields fall when prices rise.
They remained close to that level as the European Union on
Tuesday agreed to place sanctions on broad sectors of the Russian
economy, marking a significant escalation of the bloc's response to
allegations that Moscow is fueling the violent conflict in eastern
Ukraine.
"There is a definitely risk of a blowback into the European
economy [from Russian sanctions] and that is why Bunds are
rallying," said Alastair Thomas, head of rates and treasury
management at ECM Asset Management.
Any harm to the European economy resulting from fresh penalties
against Russia increases the likelihood of further easing from the
European Central Bank, he said.
Some European companies with links to Russia saw their shares
decline despite the recovery in the broader market. Renault fell
amid concerns about the possible impact of sanctions on the Russian
market, the car maker's third largest.
BP, which owns nearly 20% stake in Russian state-controlled oil
producer OAO Rosneft, slipped despite a rise in second-quarter
profit after warning investors about potential impacts of
sanctions.
The Russian ruble also came under pressure, falling 0.2% against
the U.S. dollar, to 35.62--having hit its lowest level since May
earlier in the day.
Philip Shaw, chief economist of Investec Bank PLC, said that
while the idea of sanctions isn't new, investors are becoming
unnerved by the simple intensification of conflict between the West
and Russia.
Even so, Russian stocks followed the rest of Europe higher, with
the Micex adding 0.6%.
Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at
tommy.stubbington@wsj.com