Uneasy Iraq lull gives investors some breathing space

LONDON (Reuters) - Merger and acquisition speculation gave European stocks a shot in the arm on Tuesday, while commodity and emerging market investors were somewhat calmed by the absence of an escalation in the Iraq crisis overnight.

Oil and gold eased back as U.S. and Iranian officials, in a rare sign of rapprochement, discussed the crisis on the sidelines of a nuclear conference in Vienna although they both ruled out military cooperation to face down the Sunni militant onslaught that threatens to break up Iraq.

"There is a growing sense that we could see a stalemate after the U.S. signaled that it was ready to talk with Iran," said Jim Reid, market strategist at Deutsche Bank.

The slightly more benign geopolitical backdrop allowed European equities to take their cue from M&A speculation. British pharmaceutical group Shire led European shares higher after Reuters reported Shire had hired investment bank Citi as an adviser, expecting to receive takeover approaches following a wave of deals in the sector.

"Whenever you see some M&A, you have to buy the stock market," said Toby Campbell-Gray, head of trading at Tavira Securities.

Healthcare companies have seen a wave of merger and acquisition speculation in the past two months, and Shire's stock has risen nearly 30 percent since mid-April.

At 1115 GMT Europe's leading FTSEurofirst 300 index was up 0.1 percent at 1,385 points.

Germany's DAX was up 0.2 percent at 9,906 points, Britain's FTSE 100 was 0.1 percent higher at 6,759 points and France's CAC 40 was up 0.2 percent at 4,519 points.

Brent crude oil futures fell 0.3 percent to $112.58 a barrel, pulling further back from last week's nine-month high, and gold fell 0.5 percent to $1,265 an ounce.

UK INFLATION FALLS

Investors' worries over Iraq, however, bubbled closely under the surface as the possibility of the country breaking up remains distinct following the seizure of a large swathe of northern Iraq by militants from the Islamic State of Iraq and the Levant (ISIL).

This helped support traditional safe-haven government bonds like U.S. Treasuries, with the 10-year yield at 2.59 percent, flat on the day and off last week's peak of 2.662 percent.

The immediate focus is on the Federal Reserve's monetary policy statement on Wednesday, when the U.S. central bank is expected to announce it will continue paring its bond purchase programme.

In currencies, the Australian dollar fell 0.4 percent to $0.9361 after minutes of the Australian central bank's June 3 meeting were more dovish than expected.

Sterling eased back from Monday's five-year high above $1.70 after British inflation fell to 1.5 percent in May, its lowest in over four years, casting some doubt on whether Bank of England policymakers will raise interest rates this year.

The pound slipped 0.1 percent to $1.6970, while the euro was steady against the dollar at $1.3566 and the greenback was up slightly against the yen at 102.02 yen.

Elsewhere, emerging markets took stock of a 10 percent plunge in Argentina's Merval stock market index on Monday after the U.S. Supreme Court declined to hear the country's appeal over its battle with hedge funds that refused to take part in its debt restructurings.

The move risks sending Argentina into a fresh sovereign default. President Christina Kirchner said in an address to the nation that Argentina will honour all its restructured debts, but didn't say how.

Turkey's lira and South Africa's rand held firm against the dollar.

"Despite the negative country-specific emerging market headlines, overall emerging market appetite remains fairly healthy," said Deutsche Bank's Reid.

This was despite tension in Ukraine showing no sign of abating as Russia cut off gas to its neighbour in a dispute over unpaid bills. That could disrupt supplies to the rest of Europe and set back hopes for peace between the two former Soviet countries.

(Additional reporting by Sudip Kar-Gupta; Editing by Susan Fenton)

WhatsAppFacebookTwitterLinkedinBeloudBluesky