GLOBAL MARKETS-Euro shares, peripheral bonds feel election pressure

Reuters - UK Focus

(Corrects name of strategist in 5th paragraph.)

* Shares, periphery's bonds see broadly steady start

* Euro remains under pressure on bets ECB will ease

* Investors warily eye Thailand martial law declaration

* Aussie dollar falls on mining, China uncertainty

By Marc Jones

LONDON, May 20 (Reuters) - European shares and peripheralbonds buckled for a second day running on Tuesday, as politicalangst outset optimism over fresh support from the ECB.

The premiums demanded by investors to hold Spanish, Italianand Portuguese bonds rather than German Bunds rose to two-monthhighs amid growing nervousness about this week's European Union elections.

Coupled with recent disappointing growth data, the worry isthat strong showings by Eurosceptic parties from Greece toFrance could derail domestic reforms.

Shares across the region faltered after a broadlysolid start. The main bourses in London, Frankfurt and Paris dropped 0.5, 0.3 and 0.5 percentrespectively. U.S. stock futures pointed to a lower startfor Wall Street.

The upcoming elections will be the first time since the eurozone debt crisis began that the European electorate will get achance to voice its opinion, said Kerryy Craig, a global marketsstrategist at J.P. Morgan Asset Management.

"The polls are suggesting that 25 to 30 percent of seatscould go to the Eurosceptic parties ... that shows that a lot ofpeople aren't really happy with the way things are going," hesaid. But that "may actually force the more centre right andcentre left parties to work more closely and not have the fearedbig impact on the policy direction at the European level."

The euro was back under $1.37, after two weeks of hints theECB will loosen policy, which have undermined bets the singlecurrency 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 tospeak later. Analysts will be hoping for further clues on thedecisions likely to be made at its meeting at the start of June.

"Largely baked into the (market) prices are a refi rate cutand a negative deposit rate and perhaps something additionallike a targeted LTRO," said J.P. Morgan AM's Craig. "But thechance of anything firm in terms of asset purchases is low andmarkets had maybe been pricing a little bit of that in."

THAI UNREST

Nervousness had also washed in from Asia, where Thailanddeclared martial law overnight after months of unrest and the Australian dollar dropped onuncertainty about its biggest industry, mining.

Thailand's baht initially fell against the dollar,then steadied as dealers suspected the Thai central bank hadintervened. Bangkok's SET index alsopared back some of its early losses to end down 0.8 percent.

The declaration of martial law was intended to restore peaceand order and does not constitute a coup, deputy army spokesmanColonel Winthai Suvari told Reuters.

Fitch Ratings said the move was not in itself negative. "It may even help to break Thailand out of the politicaldeadlock of the past six months, by which the two sides havefailed to agree on arrangements for new elections," said AndrewColquhoun, its head of Asia-Pacific Sovereigns.

MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan slipped about 0.3 percent. But Japan's benchmarkNikkei stock average bucked the downtrend and trackedovernight gains on Wall Street.

BOJ ON DECK

The Australian dollar was the main mover on major currencymarkets on Tuesday, falling more than half a percent after adecline in the price of iron ore, one of the country's biggestexports.

In the UK, high-flying sterling rose to a 16-month peakagainst the euro after a report showed British inflation rosemore than expected in April. That also helped to widen the gapin yields between UK and euro zone government bonds.

"The data fuels expectations for an early rate hike from theBank of England, this despite the dovish tone of the InflationReport last week," said Alex Edwards, head of corporate desk atUK Forex.

The dollar was slightly lower against the yen afterdropping to its lowest in more than three months overnight. Itlast bought 101.32 yen, down about 0.2 percent on theday.

The BoJ is set to conclude its latest two-day policy meetingon Wednesday. Governor Haruhiko Kuroda has maintained anoptimistic view of the Japanese economy, keeping expectations offurther 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 aone-month high in the previous session. Spot gold wassteady at $1,292.04 an ounce. (Additional reporting by Marius Zaharia and John Geddie inLondon; Editing by Larry King)

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