By Marc Jones
LONDON (Reuters) - European shares and peripheral bonds buckled for a second day running on Tuesday, as political angst outset 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. (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."
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.
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)