London - The rouble fell half a percent on Tuesday, leading broad-based losses on most emerging currencies on fears that Russia's decision to send humanitarian aid to eastern Ukraine could eventually lead to a military invasion.
President Vladimir Putin's spokesman said Kiev had agreed to Russia sending the convoy of about 280 trucks to east Ukraine, where government forces are closing in on pro-Russian separatists in two eastern regions.
But a Kiev government source, said there had been no such agreement.
European Commission President Jose Manuel Barroso warned “against any unilateral military actions in Ukraine, under any pretext, including humanitarian”.
Russian markets had perked up on Monday after Moscow called off military exercises near the Ukraine border, but thousands of Russian troops are still massed near the border and analysts fear they could be deployed should the aid trucks run into trouble with Ukrainian authorities.
Broader emerging markets have also been under pressure.
As well as worries over a full-fledged war in Ukraine, markets are increasingly expecting the US Federal Reserve will raise interest rates next year, potentially reducing investment flows to the rest of the world.
Emerging equities rose marginally to one-week highs as Asian shares caught up with the previous day's rally on Wall Street.
Russia's dollar-denominated share index was flat after 2 percent gains on Monday.
“The two big themes are geopolitics and the Fed, and I suspect we are going to keep seeing very choppy stock markets for the next few weeks,” said Neil Shearing, head of emerging markets research at Capital Economics in London.
“Politics point to continued standoff (between Russia and the West) which means Russian assets will stay under pressure.”
Most emerging currencies slipped, with the Russian rouble down a half percent and the Ukrainian hryvnia falling roughly 2 percent against the dollar as the central bank loosened banks' reserve requirements, potentially providing them access to around 7 billion hryvnia in liquidity.
Meanwhile fears of economic fallout from the Russia sanctions kept eastern European markets under pressure.
Data showed Polish exports to Russia down by 10.7 percent in the first half of 2014 versus 12.8 percent growth in the year-earlier period while exports to Ukraine fell 26.4 percent.
While central European currencies were trading flat, Warsaw and Budapest stocks fell more than 0.5 percent .
“With no signs of de-escalation in the Russia/Ukraine conflict, fundamental linkages and overall still-tight valuations make the risk/reward unattractive for central European sovereign credits,” Morgan Stanley analysts wrote, cutting their recommendation on Romania and Hungary to underweight, while staying neutral on Poland.
The lira slipped 0.4 percent against the dollar as Turkish president-elect Tayyip Erdogan began the process of picking his successor as prime minister, with investors fearing a move towards a more authoritarian state.
The Israeli shekel was also feeling the heat. It fell almost 0.5 percent at one point and was inching toward recent two-month lows against the dollar a day after the central bank expressed concern about the currency's valuations, fuelling expectations of another interest rate cut.
Data on Monday showed the budget deficit had widened sharply.
“The Bank of Israel's rate cut, the economic consequences from the war in Gaza, the expected widening of the budget deficit - all of these are undermining sentiment on the shekel,” the FXCM Israel brokerage told clients.
Elsewhere in the Middle East however, Cairo stocks rose 0.5 percent to a new six-year high, boosted by investors' optimism over the government's recent steps towards reform. - Reuters