By Mark Jones
LONDON (Reuters) - Fighting in Iraq and Ukraine drove a global shift into traditional safe-haven currencies, precious metals and bonds on Monday, and kept oil near a nine-month high.
The nervous mood also spread to share markets where the Nikkei .N225 in Tokyo saw its biggest fall in a month and European bourses .FTEU3 were deep in the red for the third time in four days.
Worries about Iraq were intensifying after Sunni insurgents from the Islamic State of Iraq and the Levant (ISIL) seized a mainly ethnic Turkmen city in the northwest of the country over the weekend.
It continued to drive fears about widespread turmoil in the country and the region. Iraq is oil cartel OPEC's second largest producer and Brent LCOc1 was up 0.3 percent to $112.70 per barrel in London, although it was a some distance from Friday's nine-month high of $114.69.
"I think investors are starting to look at this in terms of global risk aversion," said Stuart Culverhouse, chief economist at emerging market specialist brokerage Exotix.
"Clearly it is a fairly fluid and dangerous situation, but if there is a significant deterioration in events, then that is pretty much a lose-lose for everyone."
The rising oil prices and shrinking risk appetite weighed on emerging Asian currencies particularly, with the rupee INR=D2 hitting a five-week low and the rupiah IDR=ID and the South Korean won KRW=KFTC also withering.
It was a boon for safe-havens though. Among the major currencies the yen JPY= and Swiss franc CHF= rose EMRG/FRX, while gold XAU= hit its highest in nearly three weeks at $1,279.80 an ounce.
UKRAINE STRAINS
Iraq wasn't the only source of concern either. Hopes of Ukraine coming off the boil were dashed after pro-Russian separatists shot down a Ukrainian army transport plane, killing all 49 military personnel on board.
Economic salvos also resumed as Russian gas exporter Gazprom GAZP.MM said Ukraine had failed to adhere to a deadline to pay at least some of its gas debts. Kiev will now have to pay up front, suggesting supplies could be cut. (Full Story)
That saw both Russian and Ukraine assets fall sharply. Moscow's dollar-denominated RTS index .IRTS dropped as much as 2.5 percent as Gazprom shares slumped GAZP.MM, while Ukrainian and the rouble RUB= and hryvnia UAH= tumbled as well.
"The next big question is whether there will be any new sanctions on Russia, probably more likely from the U.S.," said Viktor Szabo a fund manager at Aberdeen Asset Management.
FED FOCUS
The dollar JPY slipped about 0.2 percent to 101.89 against the in-demand yen to leave it near a two-week low, while bets the U.S. may end up raising interest rates after Britain saw the pound GBP=D4 climb to 5-year high of $1.70.
Top-rated euro zone bonds also pushed higher as concerns over the escalating geopolitical tensions supported safe-haven government debt, outweighing general market caution ahead of the U.S. Federal Reserve's meeting which concludes on Wednesday.
The central bank is expected to press on with its $10 billion-a-month reductions in stimulus. But with it also expected to nudge down its economic forecasts, all eyes are rate hints.
"The market is already expecting less (monetary policy) tightening ahead," said Lee Hardman a currency analyst at Bank of Tokyo Mitsubishi UFJ in London, referring to the recent pricing changes in Fed fund futures contracts 0#FF:.
Wall Street ESc1 was expected to be dragged back by the Iraq worries when trading resumes, with Monday's main data focus the NAHB housing market survey for June.
Other data in focus this week is China's latest report on foreign direct investment on Tuesday, and then house price figures on Wednesday.
China's Shanghai Composite Index .SSEC was one of the few markets to register a solid gain on Monday but investors would be concerned if the latter were to show a slowdown in property price growth, raising further questions about the sector, especially given the broader economic weakness.
(Additional reporting by Lisa Twaronite in Toko Editing by Jeremy Gaunt)