European Shares Reverse Losses -- 3rd Update

By Josie Cox and Tommy Stubbington 

European shares reversed earlier losses Tuesday, largely shrugging off fears surrounding the potential implications of additional sanctions on the Russian economy, even though jitters earlier in the session had spurred a wave of demand for safe-harbor assets.

The Stoxx Europe 600 closed 0.3% higher, with traders citing some solid corporate earnings reports coupled with upbeat U.S. consumer sentiment data.

U.K. engineer GKN PLC was among the top risers after reporting an increase in first-half profit even as sales took a hit from the strength of the pound.

Earlier in the session, nerves over a potential escalation of sanctions against Russia had weighed on equities and sent investors clambering for safe-harbor assets.

The yield on the 10-year German Bund fell to a record low of 1.11%, surpassing levels seen even in the depths of the euro crisis. Yields fall when prices rise.

They remained close to that level as the European Union on Tuesday agreed to place sanctions on broad sectors of the Russian economy, marking a significant escalation of the bloc's response to allegations that Moscow is fueling the violent conflict in eastern Ukraine.

"There is a definitely risk of a blowback into the European economy [from Russian sanctions] and that is why Bunds are rallying," said Alastair Thomas, head of rates and treasury management at ECM Asset Management.

Any harm to the European economy resulting from fresh penalties against Russia increases the likelihood of further easing from the European Central Bank, he said.

Some European companies with links to Russia saw their shares decline despite the recovery in the broader market. Renault fell amid concerns about the possible impact of sanctions on the Russian market, the car maker's third largest.

BP, which owns nearly 20% stake in Russian state-controlled oil producer OAO Rosneft, slipped despite a rise in second-quarter profit after warning investors about potential impacts of sanctions.

The Russian ruble also came under pressure, falling 0.2% against the U.S. dollar, to 35.62--having hit its lowest level since May earlier in the day.

Philip Shaw, chief economist of Investec Bank PLC, said that while the idea of sanctions isn't new, investors are becoming unnerved by the simple intensification of conflict between the West and Russia.

Even so, Russian stocks followed the rest of Europe higher, with the Micex adding 0.6%.

Write to Josie Cox at [e-mail] and Tommy Stubbington at [e-mail]