* Markets put positive spin on weak US growth data
* Likelihood of low US rates helps stocks, longer-term bonds
* Sterling in focus before financial stability report
* Caution needed before US inflation data pivotal for Fed
By Patrick Graham
LONDON, June 26 Stock markets in Europe and Asia
looked past gains by Iraqi militants and poor first-quarter
growth in the United States on Thursday, with some investors
raising their forecasts for a U.S. economic bounce in coming
A Sunni insurgency in Iraq has driven oil prices as high as
$115 a barrel, threatening to raise costs for businesses around
the world. Prices eased on Thursday but remain close to
levels not seen since the start of 2013.
The surge in oil prices is the latest setback for a global
economy still trying to get back on its feet. In that light,
Wednesday's final estimate of U.S. gross domestic product in the
first quarter was only the latest argument that the Federal
Reserve will keep interest rates at record lows into next year.
Most investment houses are also much more optimistic about
the future. Some responded to the U.S. figures by raising their
estimates of second-quarter growth.
"There's a storm in the rear-view mirror, but much brighter
sunshine ahead," said Kit Juckes, a strategist with French bank
Societe Generale in London. "The storm does matter, though.
There is every reason to be optimistic about upcoming U.S. data,
and equally, every reason to expect policy to remain easy."
European stock markets had retreated after the U.S. figures
on Wednesday, then rebounded. Shares in
Barclays sank 3 percent, though, after New York's
attorney general filed a lawsuit against the UK lender.
Longer-dated bond yields fell and the dollar suffered as
funds were forced to move out the yield curve. Investors were
willing to accept just 1.26 percent to lend to Germany for 10
U.S. crude added 4 cents to $106.54 a barrel, while
Brent was unchanged at $114.00.
Top of the bill in Europe was the British pound and the
impact on it of a Bank of England report on financial stability.
The report is expected to provide the bank's newly founded
Financial Policy Committee with a vehicle to announce more
measures to curb a booming British housing market, which some
worry may be overheating again, six years after the 2008 crash.
Such "macroprudential" steps, particularly if aggressive,
might push back expectations of a rise in interest rates that
have driven sterling 10 percent higher in a year.
"There's quite a lot of uncertainty because this is all
quite new for UK assets," said Paul Robson, a currency
strategist with RBS in London.
"The devil will be in the detail, but the rule of thumb is
that the tighter macroprudential policy becomes, the looser
conventional monetary policy can be - i.e., interest rates might
not have to be raised quite as early or aggressively as they
would have otherwise been."
The prospect of the Fed keeping rates low for longer
encouraged equity investors, though some were cautious in case a
key measure of U.S. inflation due later Thursday surprised on
the high side.
The price index for personal consumption expenditures is the
Fed's favoured measure of inflation and looks likely to have
reached its highest since late 2012 in May.
Most Asian markets ended in the black with MSCI's broadest
index of Asia-Pacific shares outside Japan up
1.08 percent. Japan's Nikkei gained 0.3 percent and
Australia 1.15 percent.
"You can make the argument that the weaker the number for
Q1, the more that Q2 is going to pay back in terms of growth,"
said Alessandro Tentori, global head of rates strategy at Citi.
"This is on the assumption that Q1 has been influenced by
emerging markets weakness and weather related factors."
(Additional reporting by Wayne Cole in Sydney, Jemima Kelly in