According to docs (http://docs.sqlalchemy.org/en/rel_0_9/core/engines.html#custom-dbapi-args):
MySQLdb will accommodate Python unicode objects if the use_unicode=1 parameter, or the charset parameter, is passed as a connection argument.
Without this setting, many MySQL server installations default to a latin1 encoding for client connections.
You need to use
create_engine('mysql+mysqldb://HOSTNAME/DATABASE?charset=utf8')
rather than just
create_engine('mysql+mysqldb://HOSTNAME/DATABASE')