Iraq Fears Hit European Shares, German Bond Yields Fall

European shares fell on Wednesday, mirroring losses in the United States and Asia, as fears violence in Iraq could escalate further prompted investors to take refuge in safer assets such as German bonds.

The FTSEurofirst 300 index .FTSE of top European shares fell 0.7 percent to a three-week low, while Germany's benchmark DAX shares index .GDAXI was down 0.6 percent by 0753 GMT. The MSCI world equity index .MIWD00000PUS, which tracks shares in 45 countries, was down 0.3 percent after hitting a one-week low.

"The situation in Iraq is rattling investors and there's a risk of escalation if the U.S. decides to intervene there. This is what triggered a sell-off in the last hour of trading on Wall Street," Montaigne Capital fund manager Arnaud Scarpaci said.

U.S. Secretary of State John Kerry urged leaders of Iraq's autonomous Kurdish region on Tuesday to stand with Baghdad in the face of a Sunni insurgent onslaught that threatens to dismember the country.

His comments came as security forces fought the rebels for control of the country's biggest oil refinery and militants launched an attack on one of its largest air bases less than 100 km (60 miles) from the capital. More than 1,000 people, mainly civilians, have been feared killed in less than three weeks.

The weakness in European stocks followed a sell-off in overseas markets. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.4 percent, while Japan'sNikkei .N225 ended 0.7 percent lower. In volatile U.S. trading, the S&P 500 .SPX closed 0.6 percent weaker after hitting a fourth record high following upbeat U.S. data.

Risk-averse investors turned their attention to relatively safer assets. Yields of German government bonds, perceived as safe havens, fell towards their lowest this year. German 10-year yields DE10YT=TWEB were 1 basis point lower at 1.31 percent.

"It's a volatile situation in Iraq and Treasuries and Bunds benefit from flight to quality," said Nick Stamenkovic, bond strategist at RIA Capital Markets in Edinburgh.

Oil markets were mixed as traders weighed the likelihood of supply disruptions from Iraq. Analysts said lingering worries that continued violence in Iraq would dent supplies from OPEC's second-largest producer kept a floor under prices.

U.S. crude for August delivery CLc1 advanced 0.2 percent, while Brent crude for August LCOc1 fell 0.5 percent.

"Oil prices have been unusually stable in recent years, but events in Iraq are causing a reassessment of medium-term oil market fundamentals that we expect to translate into a phase of higher long-term prices and more volatile trading conditions," strategists at Barclays said in a note to clients.

In the currency market, the dollar slipped against the yen and eased against the euro, with some investors cautious ahead of the final reading of the first-quarter U.S. GDP.


It is forecast to be revised down and likely to boost expectations that the Federal Reserve is in no hurry to tighten policy. The dollar was down 0.1 percent versus the yen at 101.90JPY=, while the euro was up at $1.3615 EUR=.


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