Ukraine casts shadow as investors take pulse of fragile economy

Sun May 11, 2014 6:09am EDT
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By John O'Donnell

BRUSSELS (Reuters) - U.S. and euro zone data will help investors take the pulse of the global economy this week, but the crisis in Ukraine threatens to spoil any improvement.

Steady prices and good retail sales are expected to show the U.S. economy in a more flattering light this week, in encouraging news for the Federal Reserve as it pares back the stimulus that has buoyed financial markets for the last few years.

In the euro zone, where many investors are wondering if the European Central Bank will follow Washington's example by turning on its money printing presses, a continued but modest improvement in output is expected.

But a referendum on independence in eastern Ukraine called by pro-Russian separatists has underscored the threat of civil war in the country, a conflict that could rock confidence and hit trade between Russia and the rest of Europe.

"An escalation of the Ukraine crisis might be the trigger which leads to a correction and can bring uncertainty back to the rest of the world," said Carsten Brzeski, an economist with ING. "The return of uncertainty can really cost growth."

The crisis is having a dramatic impact on the already fragile Russian economy, dashing hopes that 2014 would be a year of recovery and placing the country instead on track for recession as investors dash to withdraw money.

Although European Union sanctions have been so far largely symbolic, the threat of stiffer penalties from the United States or Europe against Russia's banks or industry is scaring investors.

Diplomats have told Reuters that the first companies would be added to the list of targets to be sanctioned this week, freezing their assets in Europe and marking a toughening of stance against Russia. The European Union is Russia's top trading partner.   Continued...

The Wall St. sign is seen outside the door to the New York Stock Exchange in New York's financial district February 4, 2014. REUTERS/Brendan McDermid