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Micex Drops Most in 3 Weeks on Merkel Warning Amid Ukrain

June 20 (Bloomberg) -- The Micex Index declined, extending a weekly retreat, as fighting between Ukrainian troops and insurgents overshadowed a cease-fire proposal and German Chancellor Angela Merkel said Russia risked further sanctions.

The equities gauge lost 0.6 percent to 1,486.30 by the close in Moscow, the most since May 30 and capping a 1 percent drop this week. OAO Sberbank, the nation’s biggest lender, fell 0.8 percent and OAO Lukoil retreated 0.6 percent.

Russia risks further sanctions when European Union leaders meet next week unless it helps end fighting in Ukraine, Merkel said today. Clashes yesterday left seven servicemen dead and 30 wounded, with almost 300 militants killed near Slovyansk, the Defense Ministry said. The Micex entered a bull market June 6 after rising more than 20 percent from a low on March 14.

“If the tension in Ukraine continues to escalate, it’ll be negative for the market,” Oleg Popov, who helps oversee $1.2 billion of pension-fund assets at Allianz Investments, the money-management arm of Europe’s biggest insurer, said by phone from Moscow. “The market is declining because there’s limited room for growth after the recent rally.”

Ukrainian President Petro Poroshenko is due to present a peace plan today. Separatists with armored vehicles attacked a tank base in the Donetsk region city of Artemivsk overnight, with explosions heard and one soldier wounded.

Underweight Stocks

The renewed fighting in Ukraine may sidetrack Poroshenko’s proposal for a unilateral cease-fire to stem the daily battles that have ravaged the country’s easternmost regions since Russia annexed Crimea in March.

“We’re somewhat underweight Russian equities because although valuations look extremely cheap, the shadow from Ukraine will likely remain quite heavy,” John Lomax, an emerging-market strategist at HSBC Holdings Plc, said by phone from London. “That affects both the cyclical and structural story in Russia. There’s a lack of obvious catalyst for the Russian equity market despite its apparent cheapness.”

Preferred shares of OAO Bashneft slumped 9.6 percent to 1,654 rubles, the biggest decliner on the Micex. The stock is trading ex-dividend today.

The Micex’s 14-day relative strength index subsided to 63.2 after last week crossing the level of 70 that to some analysts signals a security has been overbought. Ninety-day historical volatility was steady at 30, according to data compiled by Bloomberg.

To contact the reporter on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Chris Kirkham, Zahra Hankir

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