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European markets fall sharply, oil spikes on MH17 disaster

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Rescuers stand on July 18, 2014 on the site of the crash of a Malaysian airliner carrying 298 people from Amsterdam to Kuala Lumpur.DOMINIQUE FAGET/AFP--Getty Images

European stock markets have fallen sharply in early trading Monday on fears that the loss of a Malaysian airliner over eastern Ukraine will lead to a further deterioration in relations between Russia and the West.

Meanwhile, oil prices have shot higher on revived fears of a disruption of supplies from Russia, the world’s largest oil producer, and the source of a quarter of Europe’s natural gas demand.

The front-month Brent crude oil futures contract was at $103.79 early Friday in Europe, up nearly $4/barrel from its level before flight MH17 crashed just north of Donetsk, where fighting between governments forces and rebels is intense.

Ukraine’s President Petro Poroshenko has claimed the aircraft was shot down by pro-Russian separatists, while Vice-President Joe Biden said the plane was “blown out of the sky”. The rebels have said they don’t have weaponry capable of hitting high-flying planes.

The Russian stock market fell most sharply, the benchmark MICEX index falling 1.3% by lunchtime in Moscow to its lowest level in nearly two weeks. The market had already fallen heavily on Thursday, after the U.S. and E.U. imposed a fresh set of sanctions, with the U.S. for the first time directly targeting companies and banks of strategic importance to the Russian economy.

The ruble, however, remained relatively stable and at midday in Moscow was only 0.6% lower against the dollar, relative to its level immediately before the crash was reported.

The Euro Stoxx 600 index, which comprises eurozone blue-chips, and the UK’s FTSE-100 were both down 0.3% in early trading. Shares of the big Stocks in airlines and reinsurance companies were under-performing.

By contrast, safe-haven instruments such as German government bonds were higher. pushing yields to within touching distance of a new record low. By mid-morning in Frankfurt, the yield on the benchmark 10-year Bund was at 1.16%, only 0.02 percent off the all-time low of 1.14% it hit late Thursday.

“It’s going to be a nervous time ahead while we await further developments but this feels like a big geopolitical blow for financial markets,” Deutsche Bank strategist Jim Reid said, pointing to the poisonous atmosphere of mutual recriminations between the two sides of the Ukrainian conflict, and their backers in Moscow and in western capitals.

Overnight, Asian stocks had put in a mixed performance, due to strength in China, but the benchmark Malaysian index had fallen 0.6%, with Malaysian Airline System Berhad, the operator of the downed plane, falling 8.9% after its second disaster in only four months.

Its shares are now down 23% over the last year, and the crash is likely to add to rumors that the airline, which has lost money in each of the last three years, will be delisted so that the state, which has majority control, can restructure it thoroughly.