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Any of Thursday's three big events could blow apart the trade that confounded Wall Street

  • Bonds and stocks have both been moving higher in the weeks ahead of Thursday's key market events and next week's Fed meeting.
  • The European Central Bank meets, and ECB President Mario Draghi speaks after the meeting.
  • Former FBI Director James Comey testifies before the Senate Intelligence Committee.
  • U.K. voters head to the polls in a snap parliamentary election.

Any of three big events Thursday, each with significant market risk, could rattle complacent markets, where bonds and stocks have been making the unusual move of going higher together.

Former FBI Director James Comey testifies at 10 a.m. ET before a Senate panel on the bureau's investigation into whether the Trump campaign had ties to Russia.

But first the European Central Bank holds a rates meeting ahead of the U.S. market open, and traders are watching to see if ECB President Mario Draghi drops any bombshells about the future of the central bank's easing program.

The U.K. also votes in parliamentary elections, called by Prime Minister Theresa May in a bid to win a greater mandate for her Brexit negotiations, but her Conservative party's lead has narrowed dramatically.

"The so-called tinder is there to change things," said Peter Boockvar, chief market analyst with the Lindsey Group. "Obviously, it's important if Comey says anything groundbreaking, but it doesn't look like that's going to happen.

"Of course, the U.K. is relevant depending on what happens with parliament," Boockvar said. "We think May will win. That's a wild card and it matters. Maybe more important to markets will be what Draghi says."

Comey's testimony on his interactions with President Donald Trump was released Wednesday afternoon, ahead of his morning appearance. Stocks moved higher within minutes in a relief trade, and yields broke their recent trend and also moved slightly higher. Bond yields move opposite price, and yields at the long end had been moving to lows not seen since the election. The 10-year was yielding 2.18 percent in afternoon trading, lifting off its earlier level of 2.14 percent.

Comey's appearance before the Senate Intelligence Committee has been seen as key since reports last month indicated that the former FBI director had been asked by Trump to drop his investigation into Michael Flynn, former national security director. Trump fired Comey, and this will be the first time he is being heard from.

Traders said the response to the released testimony was positive since it showed no smoking gun and included comments that the president was not under investigation.

"Gold came down a little. They're moving away from the safe havens. ... There was a mild adoption of risk," said Art Cashin, director of floor operations at UBS.

"The idea that [Comey's] going to limit [what he says] keeps coming up. But it's going to be a circus," said Cashin. "The real wild card here is Trump, and the fact he's intending to do live tweeting while Comey testifies."

George Goncalves, head of fixed income strategy at Nomura, said the ECB could be a bigger deal for markets. There has been speculation that Draghi could talk about further tapering of the ECB's 65 billion-euros-a-month asset purchase program, or quantitative easing. But many analysts expect the announcement of that change to come at September's meeting instead. The ECB issues its rate decision at 7:45 a.m. ET, and Draghi speaks at 8:30 a.m.

Goncalves said Thursday's big events have stood in front of the market, keeping downward pressure on yields, even as stocks drifted near highs. Usually when yields move lower in a flight-to-safety trade, stocks move lower as well.

"I think this has the potential of breaking that correlation, which has been a weird one," said Goncalves. "It happens a lot during quantitative easing, but we're not doing quantitative easing. Bonds up and stocks up when the Fed is going to raise interest rates? It's a contradiction, and the market has been ignoring the Fed."

The Fed meets Tuesday and Wednesday and is widely expected to raise interest rates.

"Maybe we could get a scenario where bonds were wrong and stocks were right after all," said Goncalves. "My comment speaks to the fact that bond markets are skeptical of the equity market so any sort of dialing back on some of the concerns around policy getting done would be bad for bonds."

The ECB is not expected to move on rates, but could, as reported, reduce its inflation forecast. That would be a dovish signal at the same time it may upgrade its economic forecast and remove concern about downside risks to the economy.

The risk for markets is that the ECB sounds more hawkish than expected. That would be a surprise and could drive the euro higher, interest rates higher and stocks lower.

"I think it's going to be critical how [Draghi] handles this meeting. There's the intersection of a lot of conflicting motivation here," said Robert Tipp, PGIM Fixed Income chief investment strategist, head of global bonds and foreign exchange. "There are northern countries that want to end the bond buying and negative interest rates, but for Mario Draghi, inflation doesn't suggest they're moving toward their target. ... I think he's going to toe the party line that policy is what policy is through the rest of the year."

In the U.K., election results are expected late in the evening. May is expected to win, but the Labour Party has been gaining in the polls.

"If you get an indecisive hung parliament result, that would be a negative for the U.K. I don't know that it would have a meaningful spillover effect," said Tipp. But the concern is currencies and U.K. markets could become volatile.

After Thursday's events, the bond market should start to look forward to next week's Treasury auctions and Fed meeting, if there are no surprises from Comey or Draghi, and May wins the election.

"This clears the deck for the auctions, and the Fed next week, for which we're not pricing in enough of a concession," said Goncalves. "We get through tomorrow, and [yields] keep riding higher into the Fed, and the Fed will ultimately dictate where we go." He said the 10-year yield could return to 2.20 to 2.30 percent after Thursday's events.

"I think the political uncertainty that was hanging over markets did benefit flight-to-safety type trades for Treasurys, but that wasn't the only reason" yields were low, said Goncalves.

Treasury yields have been moving lower as traders bet Congress would be too preoccupied with the investigation to push through tax breaks and other policy. Stocks have held highs and moved higher on improved earnings and also on relatively easy central bank policies.

"I think bonds are right," said Jack Ablin, CIO of BMO Private Bank. "It's just the economic backdrop. Given what's going on with easy financing and the fact that companies are buying back shares and getting rid of shares outstanding, I think stocks are also right. But they are both feeding on the quantitative easing trough."