Markets Steady Ahead of U.K. Election, ECB Meeting -- 2nd Update

Investors regained some risk appetite Wednesday, ahead of key political events later in the week.

The Stoxx Europe 600 rose 0.2% in the European morning. Banks, which are one of the riskier sectors, were up 0.7%. This was despite a 2.5% drop in Banco Santander SA's stock after it announced the takeover of Spanish rival Banco Popular Español SA, which European authorities declared had been "likely to fail."

Futures pointed to a flat opening for the S&P 500.

Some of the market's preferred havens gave up a small part of their weekly gains. Gold was down 0.1%, despite rising 1.2% this week. Yields on 10-year U.S. government debt were up slightly, after closing overnight at the lowest level since Nov. 10. Yields move opposite to prices.

Money managers have flocked into safety this week, waiting for a series of scheduled events that have the potential to create big moves in global markets.

On Thursday, the European Central Bank will provide further clues on how long ultraloose monetary policy will remain in place, and testimony by former U.S. Federal Bureau of Investigation Director James Comey will test the stability of Donald Trump's presidency. Early results for the U.K. general election will start coming Thursday night, with the latest polls suggesting a very tight race.

The trio of risk events has been "sufficient to keep markets on the defensive," OCBC Bank said in a note Wednesday.

There are signs that investors find themselves at an impasse. Over the last month, U.S. equities have rallied and economic data have remained robust, but at the same time safer stocks have matched the performance of riskier ones, gold has powered ahead and government bond yields have erased much of their gains since the U.S. election in November.

The U.S. dollar bounced back Wednesday and was up 0.2% against the euro, but the WSJ Dollar Index is at its lowest since November. On the month, the euro is up 2.4% against the dollar.

Mr. Comey's testimony adds to risks that the Trump administration will fail to deliver a sizable fiscal boost, which lowers the chances of inflation going much higher.

"It's less about the rallying into safety havens and more about toning down interest rate expectations," said Zhiwei Ren, fund manager at Penn Mutual Asset Management. "I don't think inflation can surprise on the upside at this point, and that means the Fed can take its time to raise rates."

Indeed, many analysts now believe recent increases in inflation are mostly the result of higher oil prices, rather than stronger consumer demand, and such effects could start to fade soon. Last week, official figures showed eurozone inflation falling to 1.4% in May, after coming close to the ECB's target of close but below 2% for several months.

Oil prices have appeared range bound between $45 and $55 a barrel since the start of the year. On Thursday, the Brent crude barrel lost 0.7% to trade at $49.74.

Steven Bell, chief economist at BMO Global Asset Management, underscored that many global factors will keep inflation down even as earnings improve: Companies have gained bargaining power over workers and are now able to fatten their margins without raising prices.

"Businesses have become more and more concentrated, they are expanding their margins by consolidating or reducing costs," he said.

Weaker-than-expected inflation is likely to keep boosting bonds even if stocks keep rallying, analysts said, because central banks will wait for longer before tightening monetary policy further.

Antje Praefcke, analyst at German lender Commerzbank AG, said the ECB's meeting tomorrow "might bring a little disappointment for some," even though most investors believe that policy makers are still on course to slowly roll back stimulus.

ECB President Mario Draghi "would have to be very outspoken, vehemently rejecting a change of the forward guidance for the market to lower the market's rate expectations and for the euro's upside momentum to be slowed," Mr. Praefcke said.

In Asia, the Japanese Nikkei Stock Average and Australia's S&P/ASX 200 both closed flat, while Korea's Kospi lost 0.4%. The Shanghai Composite Index was up 1.2%.

Ese Erheriene contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

June 07, 2017 05:50 ET (09:50 GMT)