European Markets Cautious Amid Iraq Tensions

Escalating tensions in Iraq remained the key focus of European markets Friday, luring investors to assets perceived to be safe--an urge that helped gold to its biggest daily gain in nine months in the previous session.

On Thursday, U.S. President Barack Obama ordered up to 300 members of U.S. special-operations forces to Iraq, while ruling out immediate airstrikes against Sunni extremists and stepping up the pressure on Baghdad to form a government that bridges the country's ethnic and religious divisions.

Gold was trading at $1,308.00 an ounce on Friday, marking a price increase of around 5% since the start of June. Brent crude was at $114.92 a barrel up more than 5.5% over the same period.

"The stakes are high for the oil market," Barclays analysts wrote in a note. "Supply is currently constrained, with Libyan production set to be offline for a while and Iran's sanctions-restricted barrels likely to be slow to return to the market."

Citigroup strategists, meanwhile, said that the longer the Iraq insurgency lasts and the more divisive it becomes, the more difficult it will be for Iraq to even approach its potential to sustain production at six million barrels a day or more.

This, they said, would have "radical implications for oil markets at a time of growing lost production world-wide due to intensifying disorder in more petroleum-producing countries."

If the rally continues, it could also start to have implications for currency markets, said Colin McLean, the chief executive of Edinburgh-based investor SVM Asset Management. "Countries that are particularly dependent on energy imports are particularly vulnerable," he said.

Meanwhile, Russia started massing troops near its border with Ukraine again, the North Atlantic Treaty Organization said.

After opening the session slightly weaker, equity markets tentatively extended Thursday's gains, still encouraged by reassurance from the U.S. Federal Reserve that it isn't about to raise interest rates.

Fed Chairwoman Janet Yellen reiterated Wednesday that interest rates would stay low for a relatively long time, even though she also provided an upbeat assessment of the outlook for the world's largest economy.

By midmorning, the Stoxx Europe 600 was up 0.1% on the day, while the U.K.'s FTSE 100 added 0.2%. France's CAC-40 and Germany's Dax both added 0.1%.

In the U.S., futures indicted the S&P 500 would open unchanged, with investors consolidating their gains after the index clocked a second straight record close on Thursday. Changes in futures, however, aren't necessarily reflected in market moves after the opening bell.

Notable gainers in Europe included Shire, which rose more than 13% after the U.K. drug maker rebuffed an offer from U.S. rival AbbVie Inc. AbbVie said Friday that Shire had rejected three cash and share proposals made to the board, with the latest valued at GBP46.26 ($78.83) for each Shire share, for a total value of $46.35 billion.

Currency markets were largely quiet too.

Having lost ground over the past two sessions, the dollar was broadly flat against the euro Friday, at $1.3612, after the euro on Thursday hit a 10-day high against the greenback.

Sterling remained a whisker above $1.70. It has held firm since Bank of England Governor Mark Carney last week said that a rise in interest rates may come sooner than markets have been expecting. On Wednesday, minutes from the latest policy-setting meeting showed that some members of the Monetary Policy Committee were "surprised" by the low probability investors attached to a shift in interest rates this year.