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 The premiums demanded by investors to hold Spanish, Italian and
Portuguese bonds rather than German Bunds rose to two-month highs
amid growing nervousness about this week's European Union elections.
<GVD/EUR>
Coupled with recent disappointing growth data, the worry is that
strong showings by Eurosceptic parties from Greece to France could
derail domestic reforms.
Shares across the region <.FTEU3> faltered after a broadly solid
start. The main bourses in London <.FTSE>, Frankfurt <.GDAXI> and
Paris <.FCHI> dropped 0.5, 0.3 and 0.5 percent respectively. U.S.
stock futures pointed to a lower start for Wall Street.
The upcoming elections will be the first time since the euro zone
debt crisis began that the European electorate will get a chance to
voice its opinion, said Kelly Craig, a global macro strategist at
J.P. Morgan Asset Management.
"The polls are suggesting that 25 to 30 percent of seats could go to
the Eurosceptic parties ... that shows that a lot of people aren't
really happy with the way things are going," he said. But that "may
actually force the more center right and center left parties to work
more closely and not have the feared big impact on the policy
direction at the European level."
The euro was back under $1.37, after two weeks of hints the ECB will
loosen policy, which have undermined bets the single currency would
top $1.40.
A trio of ECB policymakers - Finland's Erkki Liikanen, Austria's
Ewald Nowotny and Spain's Luis Linde - are all due to speak later.
Analysts will be hoping for further clues on the decisions likely to
be made at its meeting at the start of June.
"Largely baked into the (market) prices are a refi rate cut and a
negative deposit rate and perhaps something additional like a
targeted LTRO," said J.P. Morgan AM's Craig. "But the chance of
anything firm in terms of asset purchases is low and markets had
maybe been pricing a little bit of that in."
THAI UNREST
Nervousness had also washed in from Asia, where Thailand declared
martial law overnight after months of unrest and the Australian
dollar dropped on uncertainty about its biggest industry, mining.
Thailand's baht initially fell against the dollar, then steadied as
dealers suspected the Thai central bank had intervened. Bangkok's
SET index <.SETI> also pared back some of its early losses to end
down 0.8 percent.
The declaration of martial law was intended to restore peace and
order and does not constitute a coup, deputy army spokesman Colonel
Winthai Suvari told Reuters.
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Fitch Ratings said the move was not in itself negative. "It may even
help to break Thailand out of the political deadlock of the past six
months, by which the two sides have failed to agree on arrangements
for new elections," said Andrew Colquhoun, its head of Asia-Pacific
Sovereigns.
MSCI's broadest index of Asia-Pacific shares outside Japan
<.MIAPJ0000PUS> slipped about 0.3 percent. But Japan's benchmark
Nikkei stock average <.N225> bucked the downtrend and tracked
overnight gains on Wall Street.
BOJ ON DECK
The Australian dollar was the main mover on major currency markets
on Tuesday, falling more than half a percent after a decline in the
price of iron ore, one of the country's biggest exports. <FRX/>
In the UK, high-flying sterling rose to a 16-month peak against the
euro after a report showed British inflation rose more than expected
in April. That also helped to widen the gap in yields between UK and
euro zone government bonds.
"The data fuels expectations for an early rate hike from the Bank of
England, this despite the dovish tone of the Inflation Report last
week," said Alex Edwards, head of corporate desk at UK Forex.
The dollar <.DXY> was slightly lower against the yen after dropping
to its lowest in more than three months overnight. It last bought
101.32 yen, down about 0.2 percent on the day.
The BoJ is set to conclude its latest two-day policy meeting on
Wednesday. Governor Haruhiko Kuroda has maintained an optimistic
view of the Japanese economy, keeping expectations of further policy
easing at bay.
In commodities trading, U.S. crude rose slightly, to $102.77 per
barrel, after the weaker dollar lifted it close to a one-month high
in the previous session. Spot gold was steady at $1,292.04 an ounce.
(Additional reporting by Marius Zaharia and John Geddie in London;
Editing by Larry King)
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