* 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 (Reuters) - 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 months.
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 years.
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 London)