European stocks rise, core bonds fall as Ukraine fears ease

European stocks rebounded strongly and prices of top-rated bonds fell on Monday as investors breathed easier over the crisis in Ukraine, which had appeared to escalate dangerously on Friday.

The dollar edged higher versus a basket of currencies. It fell broadly on Friday after the government in Kiev said its artillery had partially destroyed a Russian armoured column, while Russia denied its forces had crossed into Ukraine. Brent crude oil prices fell more than $1 to trade below $103, erasing a similar rise on Friday blamed on the Ukraine tensions and as Libya, another trouble spot, increased supply.

Fears Friday's clash could have prompted a military response from Moscow proved unfounded, though fighting between Ukrainian forces and pro-Moscow separatists continued. Kiev said on Sunday its troops had raised the national flag over a police station in the rebel stronghold of Luhansk.

The foreign ministers of Russia, Ukraine, France and Germany met in Berlin. Russia's Sergei Lavrov said no progress had been towards a ceasefire but that all issues related to a Russian humanitarian convoy heading for Ukraine had been resolved. "There are some hopes that they might be able to make some diplomatic progress ... But the two sides are still far off a diplomatic solution and it shouldn't be a trigger for a Bund sell-off," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.

The pan-European FTSEurofirst 300 stock index was 1.3 percent higher, reversing Friday's losses. Germany's Russia-exposed DAX index added 1.7 percent. Russian shares and the rouble also firmed.

Asian shares traded broadly flat. MSCI's main measure of Asia-Pacific shares outside Japan was down 0.03 percent.

Wall Street initially took a hit on Friday after the report of the attack on the Russian column but later pared losses. The Dow Jones Industrial average, which briefly turned negative for the year, and S&P 500 indexes both fell but the tech-heavy Nasdaq rose. Yields on U.S. Treasury bonds, often sought at times of heightened tension, fell on Friday. Ten-year bonds hit 2.34 percent, their lowest since mid-June 2013, but traded above 2.36 percent on Monday.

Yields on German 10-year debt, the euro zone benchmark, rose 1.9 basis points to 0.994 percent, still close to record lows.

IRISH YIELDS

Irish 10-year yields fell 2.9 bps to 1.97 percent after Fitch upgraded Ireland's credit rating to A-minus on Friday, citing progress on its finances over the last year. It completed an 85 billion euro bailout programme last year.

In currency markets, the euro was less than 0.1 percent down at $1.3388, still close to a nine-month low of $1.3333 hit on Aug. 6. The dollar edged up to 102.47 yen.

Analysts said dollar moves were likely to be restrained by the wait for the annual meeting of central bankers in Jackson Hole, Wyoming at the end of the week.

Adam Myers, head of European FX strategy with Credit Agricole in London, said there were particular risks to the dollar against the euro.

"The euro tried several times to break out higher last week and was stopped each time around $1.34. I think the danger is we may see that (barrier) broken this week."

Sterling, which ended of Friday with it sixth consecutive weekly fall as a lack of wage growth pushed back expectations of when the Bank of England would raise interest rates, rose on Monday after BoE Governor Mark Carney said in a newspaper interview on Sunday a rise in real wages was not a pre-condition for a rate hike.

The pound was last up 0.2 percent at $1.6733, having hit a four-month low of $1.6657 on Thursday.

Brent crude for October delivery was last down 1 percent at $102.52 a barrel, reflecting reduced political tension and the Libyan supply increase.

Gold slipped below $1,300 an ounce in Asia and was last trading at $1,300.85.