* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* ECB dovishness sends euro, bank stocks lower, bonds rally
* Dollar recovers from knock by yen ahead of Comey testimony
* Oil steadies, Qatar bonds extend falls after S&P downgrade
By Marc Jones
LONDON, June 8 European bonds jumped and the
euro and bank shares stumbled backwards on Thursday, as ECB
chief Mario Draghi took markets by surprise on Thursday with a
robust signal the bank had no plans to cut back its stimulus any
It was the first instalment of a packed day for markets,
which includes the Senate testimony of the FBI chief fired last
month by U.S. President Donald Trump, and will conclude with the
result overnight of a snap election in Brexit-bound Britain.
Wall Street opened broadly steady in New York after the
latest drop in jobless claims, but it had been set to be more
impressive before Draghi's caution.
Despite data earlier in the day showing the euro zone
growing at its fast clip since the ECB started printing money,
the ECB head played down expectations that had been building
that it could soon be scaling it back.
"I want to emphasise that basically the ECB will be in the
market for a long time," Draghi said at meeting held in Estonia.
Asked about possibility of reducing its asset purchases in
September he added: "That was not discussed."
European banks led a sharp stocks retreat after
Draghi's comment but another sharp U-turn hoisted them up more
than 1 percent again. The rise came after signs emerged of
another euro zone bank rescue, this time in Italy,
as well as a pop in energy stocks as oil recovered from a 5
Draghi's comments also briefly knocked the euro back below
$1.12 while bond yields slumped in Germany, hit a multi-month
low in Spain and saw the biggest drop since December in Italy.
"The market's initial assessment is that the ECB is not
quite as close to policy normalisation as previously thought,"
said Philip Shaw, chief economist at Investec in London.
The dollar was also beginning to find some traction having
been 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 later began testifying to
the U.S. Senate Intelligence Committee over his statement that
Trump asked him to drop an investigation into the ties the
president's former national security adviser had with Russia.
Wall St markets largely shrugged off Wednesday's written
testimony releases as not toxic enough to ratchet up the threat
to Trump of an impeachment.
"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."
BATTLE FOR BRITAIN
With the VIX implied volatility index, the markets'
so called 'fear gauge' hovering just above 10 percent, similar
arguments are being made about the UK election, the race for
which has tightened drastically in recent weeks
London's FTSE was beginning to sag as the day wore
on and after a solid start the pound had drew back to
For all the speculation about a hung parliament or a
Labour-led coalition, the central assumption was the governing
Conservatives would slightly increase their majority, a result
also suggested by recent, though divergent, opinion polls.
Spot sterling has been firm in recent days, although
the jump in overnight implied volatility readings to some 30
percent – the highest since July – showed some pricing of
possible risks over the next 12-18 hours.
The biggest moves of the week so far remain centred around
ebbing energy prices and inflation outlooks in general.
Brent crude stabilized at $48.50 a barrel in
European trading, after another steep drop briefly below $48
overnight. It is now down more than 7 percent year-on-year.
With inventories showing no easing of the global glut, a row
between Qatar and its Arab neighbours is seen as undermining the
OPEC consensus about production cuts to limit oil supply.
Financially, the isolation of Qatar is taking its toll on
the country’s debt and currency markets. Standard & Poor's
downgraded Qatar's debt on Wednesday and Moody's warned on
Thursday that it saw risks too if the situation continued.
The riyal currency held near to an 11-year low in its pegged
band and though stocks bounced more than two percent, Qatari
sovereign dollar bonds extended their losses and the cost of
insuring exposure to the kingdom's debt rose to the highest
level since mid-November.
"We expect that economic growth will slow, not just through
reduced regional trade, but as corporate profitability is
damaged because regional demand is cut off, investment is
hampered, and investment confidence wanes," S&P said.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Marc Jones; Editing by Jon Boyle)