By Sruthi Shankar and Shashank Nayar
(Reuters) -European shares ended flat on Tuesday as gains in auto and travel shares were offset by geopolitical risks, with some Western countries imposing sanctions on Russia after it ordered troops into two breakaway regions of eastern Ukraine.
The pan-European STOXX 600 index was flat, with automakers, travel stocks and technology shares the top gaining sub-indexes, while retailers and financial stocks were among the biggest losers.
Germany put a new Russian gas pipeline on ice and Britain hit Russian banks with sanctions as the West responded to Moscow's recognition of two separatist regions in Ukraine and a speech by President Vladimir Putin suggesting more belligerent aims.
Germany's DAX fell the most among major European indexes, as it is seen as more vulnerable due to the country's heavy reliance on Russian gas supplies.
Oil stocks slipped 0.1%, despite a jump in crude prices to their highest since 2014, as investors feared stronger commodity prices would stoke more inflation.
"The implication for Europe would be mainly via gas and oil prices, but it is within Russia's interest to make sure that the disruption isn't too great. That's behind the muted market reaction for now," said Seema Shah, global chief strategist at Principal Global Investors.
Meanwhile, analysts at TS Lombard were of the view that Western sanctions on Russia appeared limited and Russia would not expand beyond the now recognised Donbas districts.
"The initial package of U.S. sanctions appears limited (forbidding investment into Ukraine’s separatist regions), while EU leaders are split on the severity of the sanctions to enforce," said Davide Oneglia, senior economist at TS Lombard.
A common gauge of volatility across euro zone equities eased after touching 39 points, its highest since June 2020, in the previous session.
Euro zone banks fell 0.7% as investors scaled back their expectations for an European Central Bank rate rise in 2022, pricing in an around 95% chance of a 10 basis point (bp) hike in July and of 40 bps in hikes by the year-end. [GVD/EUR]
Shah said she has been sceptical about an ECB rate hike this year, given concerns about the strength of the European economy and added complications from the Russia-Ukraine situation.
European banks on Tuesday were bracing for fallout and fresh sanctions, with HSBC warning of market contagion and Austria's Raiffeisen Bank International preparing "crisis plans."
Volkswagen AG (OTC:VWAGY) surged 7.8% and Porsche SE rallied 11.3% to the top of the STOXX 600 following news the companies are in advanced discussions about a potential IPO of luxury carmaker Porsche AG.