Shares and peripheral bonds feel European election pressure

European shares and peripheral bonds buckled for a second day running on Tuesday, as political angst offset optimism over fresh support from the ECB.
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.

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.”


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.