Russia turmoil spurs flight to safety

By Lionel Laurent

LONDON (Reuters) - Fears of a full-blown crisis in Russia and oil's continued slide pushed investors to seek safety on Wednesday, buying core bonds and selling stocks while the ruble failed to halt its prolonged tumble.

Investors were also looking ahead to the U.S. Federal Reserve's final statement of 2014, due at 1400 ET. Analysts expect it to remove language pledging to wait a "considerable time" before raising U.S. interest rates, even as Russia's spiraling currency crisis adds to the volatile environment.

U.S. equity futures were up 0.8 percent, pointing to a higher open for Wall Street ahead of the Fed statement, while the dollar edged up, recovering ground against the yen after data showed Japanese exports rose less-than-expected in November.

The global economy is ending the year in a fragile state and concerns over whether disinflation will morph into deflation have spread worldwide.

One of the European Central Bank's favored measures of longer-term inflation expectations fell below 1.60 percent for the first time, after data confirmed falling prices of fuel and heating oil helped keep euro zone inflation low in November.

German bund yields, which set the standard for euro zone borrowing costs, held near record lows reached on Tuesday, when U.S. 10-year T-note yields also plumbed fresh two-month lows.

While there appeared to be some initial respite for the Russian ruble on Wednesday after the finance ministry said it had begun selling foreign currency, the rebound was short-lived and the currency was down 1.3 percent against the dollar and 0.2 percent down against the euro.

"It's fair to say that we are to a large degree on hold ... until we get a clear idea about what the Fed is actually going to do," said Simon Derrick, chief currency strategist at Bank of New York Mellon in London. "That matters ... most pertinently because of what it means for the oil price."

If a change in the Fed's language prompts a surge in the dollar, oil prices may decline, potentially feeding through into more turmoil across markets, he said.

Oil prices held near multi-year lows of around $60 a barrel, with Brent crude down 60 cents to $59.41. Although oil's slide this year was triggered primarily by a supply glut, concerns about cooling demand have also weighed on prices and hit financial markets in recent weeks.

The ruble's collapse has prompted many funds to bail out of emerging assets, taking MSCI's emerging equity index to new 17-month lows while emerging dollar bonds' average spread over U.S. Treasuries stood at new 5-1/2 year highs of 474 basis points.

The Russian economy remains in the grip of a "perfect storm" of low oil prices, looming recession and Western sanctions over the Ukraine crisis.

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Russian shares were mixed with the dollar-denominated RTS index up 6.5 percent - the first daily gains after a nine-day losing streak - while the ruble-based peer MICEX traded 0.6 percent lower.

Markets were also focusing on Greece, which holds the first of three potential rounds of a presidential vote later in the day that will determine whether the country is forced into snap elections and a new period of political turmoil.

Greece's benchmark equity index was up 3 percent, but analysts said this was down to a technical recovery after the index fell 20 percent last week. Any fallout for the euro zone from Greek turmoil is seen as more political than financial, due largely to measures taken during the euro zone debt crisis.

STOCKS

At 0648 ET, the pan-European FTSEurofirst 300 equity index was 0.6 percent lower and the MSCI All-Country World index was down 0.3 percent near mid-October levels.

Stocks exposed to Russia and Eastern Europe have taken a big hit as investors assess the possibility of Russian capital controls or writedowns. They include Austria's Raiffeisen Bank, which hit a new all-time low on Wednesday; Reuters reported it was looking to sell its Polish unit, according to sources.

"The attack this week on the ruble has been quite violent, and the market is now pricing in a recession in Russia next year," said Arnaud Scarpaci, fund manager at Montaigne Capital.

"A lot of European companies exposed to Russia are under pressure. It's better to avoid names such as Metro, Nokian and Societe Generale, at least until things stabilize in Russia."

Energy shares outperformed, however, as some investors felt that the recent sell-off had gone too far and that some oil and gas firms were now ripe for a takeover at battered valuations.