Stock markets extended gains on Tuesday afternoon, continuing to bounce back from a heavy bout of selling, as Russian President Vladimir Putin quelled fears of immediate conflict in Ukraine.
Putin, speaking at a press conference in Moscow on Tuesday, said there was “no need yet” for Russia to exercise its authority, adding that he was not considering the annexation of Crimea and any force used would be a last resort. He also directly addressed Monday’s heavy selling in stock markets saying that the move would only be “temporary.”
Russia’s MICEX Index pushed higher on Tuesday, surging over 5 percent, having lost nearly $60 billion in market capitalization on Monday, ending the session down 11 percent – its worst fall in five years.
(Read our live blog: Ukraine crisis: Latest news and market reaction)
Heavily weighted Russian stocks claw backed Monday’s losses with MegaFon higher by 4.5 percent, Gazprom climbing 8.7 percent and VTB Bank adding 6 percent. Ukrainian stocks also gained with Kiev’s UAX Index rising by 6 percent. European indexes followed suit, with Germany’s DAX, France’s CAC and the U.K.’s FTSE all trading around 2 percent higher.
U.S. stocks jumped on Tuesday, with the Dow and S&P 500 bouncing back after their worst hit in a month.
Timothy Ash, the head of emerging market research at Standard Bank said that Putin’s words constituted a turnaround by the Russian president.
“This looks, feels and smells like a Putin climb-down, if there is such a thing. He took this right to the edge, but ultimately was probably struck by the unified western response and the threat of western economic sanctions,” he said in a research note. “In the end Putin’s bluff was called, and he blinked first, well let’s hope.”
Putin’s press conference came after reports that the president had ordered troops that took part in military exercises this week to return to base. This accentuated a modest relief rally on Tuesday morning and markets opened in positive territory. The cost of insuring against swings in euro zone blue chips, as measured by the Euro STOXX volatility index, fell to 18.27 points by midday London time. The index rose 30.4 percent, its biggest one-day rise since 2011, on Monday, reaching a level of 21.9 points.
(Read more: Russian markets hit as Putin tightens grip on Crimea)
U.S. Secretary of State John Kerry arrived in Kiev on Tuesday and announced an economic package and technical assistance for Ukraine in a show of support for its new government.
Kerry’s visit comes as Washington and its allies step up pressure on Moscow to withdraw troops from Crimea or face economic sanctions and diplomatic isolation.
Both Brent and U.S. crude fell more than $1 each on Tuesday and gold prices – often seen as a safe haven during times of geopolitical instability – fell 1 percent on Tuesday, retreating from Monday’s four-month high.
“Markets are making hay – stocks are rallying and clawing back yesterday’s losses as the situation stabilizes,” Kathleen Brooks, research director at Forex.com said in a research note. “Putin is still trying to save some face after this situation dramatically back-fired on him.”
Monday’s selling began with Russia’s military advance into Ukraine over the weekend, which prompted world leaders to call for sanctions on Moscow, including measures targeting banks and officials. President Obama said the U.S. was examining economic and diplomatic steps to isolate Moscow, and he called on Congress to expedite assistance for Ukraine.
(Read more: Could Ukraine trigger a full-blown EM crisis?)
Asian markets began to show signs of stability on Tuesday, with Japan’s benchmark Nikkei clawing 0.3 percent higher after Monday’ 1.3 percent fall, while Hong Kong’s Hang Seng edged up 0.4 percent following losses of 1.5 percent in the previous day.
Strategists in Asia overnight told CNBC that market instability would only be short term, suggesting that stocks were oversold. They believed that Ukraine would have a fleeting impact on global markets as the country accounts for just 0.2 percent of global gross domestic product (GDP).
(Read more: Volatile Ukraine may now face default risk)
“Let’s keep things in perspective. Ukraine had a 2012 GDP of $176 billion. Its economy is smaller than Greece, Portugal, or Ireland. It is smaller than the Czech Republic, Algeria, or Peru. So the direct impact on the global economy, even if Ukraine descended into civil war, would be minimal,” said Patrick Chovanec, managing director at Silvercrest Asset Management.
Credit ratings agency Standard & Poor’s last week lowered Ukraine’s long-term rating from ‘CCC ‘ to ‘CCC’ saying the political crisis had put the country’s ability to service its debt at risk and raised uncertainty over Russia providing promised aid.
—By CNBC’s Ansuya Harjani. Follow her on Twitter @Ansuya_H