European markets steady as UK election, ECB meeting grab attention; euro, pound flat

 A two Euro coin is pictured next to an English ten Pound note in an illustration.
A two Euro coin is pictured next to an English ten Pound note in an illustration.PHOTO: REUTERS

LONDON (REUTERS) - European stocks inched higher and the euro and the pound barely budged, as markets readied for a triple-dose of excitement - an ECB meeting, a British election and testimony by the ex-FBI chief fired by Donald Trump last month.

Much has been made of the 'Triple Threat Thursday' but beyond the commentary on the outside risks from those events it was hard to see any real trepidation in prices.

Stock markets in London, Frankfurt and Paris were flat to 0.2 per cent higher helped by reports of another bank rescue, this time in Italy, and energy shares as oil steadied after 5 per cent drop the previous day.

Italy's bonds cheered the banking sector talk and the pound and the euro were at US$1.2972 and US$1.1259 respectively, the former near a two-week high and the latter just off a seven-month high.

The US dollar was also in a holding pattern. The yen had landed a glancing blow overnight after stimulus withdrawal talk from a Bank of Japan policymaker, but the greenback had all but recovered as focus returned to the day's main events.

Former FBI Director James Comey's will be grilled by Washington politicians later over his claims that President Trump asked him to drop an investigation of former national security adviser Michael Flynn as part of a probe into Russia's alleged meddling in the 2016 presidential election.

"To be honest I'm absolutely staggered about the degree to which this geopolitical environment and developments are having absolutely no effect on markets," said Saxo Bank head of FX strategy John Hardy. "I'm old enough to remember how nervous the market used to get about this kind of stuff back in the day. I admit I don't know how to price it, but it's really staggering."

With the VIX implied volatility index, the markets'so called 'fear gauge' hovering just above 10 per cent, similar arguments are being made about the UK election and the ECB policy meeting later.

For all the scenarios of a hung-parliament or Labour-led coalition, the central assumption is for a slightly increased majority for the ruling Conservatives and averaging the very diverse opinion poll projections points to the same.

Spot sterling has been firm in recent days, although the jump in overnight implied volatility readings to some 30 per cent - its highest since July - at least shows some pricing of possible risks over the next 24 hours.

As for the ECB, soundings on downgraded inflation forecasts and background trepidation about banking sector stability make it highly unlikely it will signal any major tightening of policy ahead later. "We expect the ECB to tweak its forward guidance by dropping the easing bias on interest rates, while leaving the rest of its guidance largely unchanged, including the easing bias on asset purchases," UniCredit said in a note.