San Francisco Frontiers - Asia markets drop but signs of easing Ukraine tensions lift Europe

Equities have been in turmoil after US national security advisor Jake Sullivan warned last week that Russia could storm into Ukraine "any day now", having amassed more than 100,000 troops on its border in recent weeks.

Western powers have drawn up a series of tough sanctions against Moscow in the event of an invasion but there is a big worry that such a move would have economic consequences since the two countries are key sources of vital commodities including oil, gas and wheat.

The price of each of them has soared in recent weeks.

However, while Washington continues to fret, there was a glimmer of hope that recent diplomatic efforts could pay off, with Russian foreign minister Sergei Lavrov saying there was "always a chance" for agreement with the West.

In a televised meeting, he told President Vladimir Putin that talks with US and European leaders showed enough of an opening for progress on his goals, adding: "I would suggest continuing."

German Chancellor Olaf Scholz was due in Moscow on Tuesday for talks with Putin.

Hopes were also given a lift after a Russian defence ministry spokesman said some forces on the border were beginning to return to their bases.

"The geopolitical risks still remain elevated as Russian troops remain at the Ukrainian border, but the risk of military conflict happening this week appears to have eased," said OANDA's Edward Moya.

The exchange between Putin and Lavrov improved the mood on markets slightly, helping Wall Street off its intra-day lows, though all three main indexes ended in negative territory for a second day.

London, Paris and Frankfurt all rose in early trade.

Earlier, Tokyo retreated as investors brushed off data showing Japan's economy rebounded in the final three months of 2021, while there were also losses in Hong Kong, Sydney, Singapore, Seoul, Wellington, Taipei and Manila, but Shanghai, Mumbai, Bangkok and Jakarta edged up.

Oil prices fell around two percent at one point before paring the losses, though they remain at more than seven-year highs and within touching distance of $100 a barrel.

The long-running saga over the Fed's plans for fighting inflation -- which is at a 40-year high -- were also still on traders' minds, with the central bank expected to hike rates next month but speculation rife over how much it will move and how many more times.

St Louis Fed President James Bullard said Monday officials needed to be decisive in their actions, telling CNBC "our credibility is on the line here".

He added that the bank should "front load" its actions and raise the benchmark borrowing rate to one percent by July, echoing similar remarks last week that caused a stir on trading floors.

But some commentators warned that with prices being fuelled by factors such as surging energy costs and supply chain problems, the Fed hikes could have little effect.

"What we are seeing is a Fed that is reacting to inflationary prints even though many of the pressures on inflation are factors that the Fed really can't solve," Kristina Hooper, of Invesco, told Bloomberg Television.

"So that certainly increases the risks and reduces the clarity."

Still, with the global economy in recovery mode and most governments easing containment measures, observers remain upbeat about the outlook for markets.

"Times will certainly become somewhat rougher on the markets, as the first weeks of this year have already shown," said DWS chief investment officer Stefan Kreuzkamp.

"However, on a 12-month horizon, we stay with our positive assessment of equities," he added.

- Key figures around 0830 GMT -

Tokyo - Nikkei 225: DOWN 0.8 percent at 26,865.19 (close)

Hong Kong - Hang Seng Index: DOWN 0.8 percent at 24,355.71 (close)

Shanghai - Composite: UP 0.5 percent at 3,446.09 (close)

London - FTSE 100: UP 0.5 percent at 7,568.96

West Texas Intermediate: DOWN 1.8 percent at $93.72 per barrel

Brent North Sea crude: DOWN 1.7 percent at $94.85 per barrel

Euro/dollar: UP at $1.1333 from $1.1305 late Monday

Pound/dollar: UP at $1.3555 from $1.3526

Euro/pound: UP at 83.62 pence from 83.54 pence

Dollar/yen: DOWN at 115.54 yen from 115.55 yen

New York - Dow: DOWN 0.5 percent at 34,566.17 (close)

W.Carter--SFF