European shares drop after fire breaks out at Ukraine nuclear plant

European stocks were on track for a second session of steep losses as Russian forces seized a Ukrainian nuclear plant following another night of relentless bombardment.

The Stoxx 600 share index, which fell more than 2 per cent on Thursday, dropped a further 2.4 per cent on Friday morning. The European equity benchmark is now almost 13 per cent lower, in local currency terms, for the year. Germany’s Xetra Dax fell 3.3 per cent and London’s FTSE 100 dropped 2.7 per cent.

The assault on the Zaporizhzhia plant prompted US president Joe Biden to urge an immediate ceasefire on the site of Europe’s largest nuclear facility in south-eastern Ukraine. A fire had been extinguished at the plant early on Friday.

José Manuel Albares, Spain’s foreign minister, said Nato “will discuss” a possible intervention in Ukraine, including a potential no-fly zone, at a meeting of alliance foreign ministers on Friday, although one remains unlikely.

Investors have until now focused on the potential for further sanctions against Russia to disrupt supply chains, cause a sustained surge in commodity prices, push the eurozone economy into stagflation and hobble the US recovery from the coronavirus crisis. Now, many are also struggling to price in what has begun to feel like a relentless escalation of negative events.

“The market is struggling to very quickly process the new information that is constantly coming out about the escalating conflict,” said Georgina Taylor, multi-asset fund manager at Invesco.

“There has been quite a lot of commentary about how, historically, market reactions to geopolitical risk tend to be short term but it feels increasingly like there is no true historical comparison for this,” she added. “Initially the effects on certain sectors’ cost bases and on supply chains was the focus but I do worry it’s going further beyond that now.”

Brent crude jumped as much as 3.4 per cent to $114.23 on Friday, before later trimming its gains. The international oil benchmark on Thursday hit its highest level since 2012.

An S&P barometer of raw materials prices is on track for its biggest weekly rise in 50 years, reflecting Russia and Ukraine’s strategic importance as producers, particularly for Europe. The annual pace of eurozone inflation is forecast to top 6 per cent this month. Russian natural gas, oil and coal provide between a fifth and a quarter of western Europe’s primary energy supply, according to analysis by research house Gavekal.

The yield on the 10-year US Treasury note fell 0.05 percentage points to 1.79 per cent on Friday as its price rose. Germany’s equivalent Bund yield fell 0.03 percentage points to minus 0.01 per cent.

The dollar index added 0.3 per cent.

Futures markets implied Wall Street’s S&P 500 and the technology-heavy Nasdaq 100 would both fall 0.5 per cent in early New York trades.

As the impact of the war and sanctions on Russia reverberates through global markets, investors are also debating whether the US and European central banks will reverse plans to raise borrowing costs from pandemic-era record lows.

Before Russia invaded Ukraine, the US Federal Reserve had been expected to increase interest rates more than seven times this year. Derivatives markets are now pricing fewer than six quarter-point rises by December.

Non-farm payrolls data on Friday are expected to show US employers added 400,000 jobs in February and wages rose at an annual rate of 5.8 per cent, piling pressure on the Fed to prevent an inflationary spiral of wages and prices.

In Asia-Pacific, Hong Kong’s Hang Seng share index closed 2.5 per cent lower and Tokyo’s Nikkei 225 lost 2.2 per cent.