* Gold, German bunds at 6-week highs as safe assets thrive
* U.S. stocks set to open lower, European shares hit
* Sterling stays steady as polls narrow before UK election
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh (Adds quotes, updates prices)
By Abhinav Ramnarayan
LONDON, June 6 (Reuters) - U.S. Treasury yields and the dollar dropped to seven-month lows on Tuesday and world stocks slid as political uncertainty from the United States to the Middle East and weakness in commodity markets pushed investors away from risky assets.
The yen and gold also gained amid prevailing caution as an Arab rift opened up around Qatar, and ahead of testimony from the former head of the FBI, a British election and the European Central Bank’s next move which all happen on Thursday.
Wall Street was expected to open around 0.3 percent lower for what would be a second day of losses after both European and Asian stocks had fallen during their sessions.
The dollar, meanwhile, was at its weakest since November against other top world currencies as U.S. government bond yields fell below 2.15 percent, their lowest since Donald Trump’s election last year.
“We’ve had a little bit of a cooling off in equities following the breaking of links with Qatar - a lot of people think it may force oil prices lower and remove some of the inflationary pressures,” said RBC economist Cathal Kennedy.
“As those pressures ease, it pushes out the horizon for interest rate rises.”
On what BayernLB analysts called “Super Thursday”, British voters will also go to polls in an increasingly unpredictable general election, the European Central Bank is due to meet and later the same day and former FBI director James Comey will testify before Congress.
“We have a big week or so ahead of us with the UK heading to the polls and the ECB announcing its latest monetary policy decision on Thursday and the Federal Reserve doing the same next Wednesday,” said Craig Erlam, a market analyst for OANDA securities. “Once these events pass, we may have a little more clarity and therefore see a little less caution in the markets.”
The diplomatic spat in the Middle East left oil prices hovering just below $50 a barrel and this in turn hit European stocks, which tumbled across the board; the broad Euro STOXX 600 was down 0.65 percent while German stocks were down nearly 1 percent.
World stocks edged further away from record highs hit last week, and the MSCI world equity index, which tracks shares in 46 countries, fell 0.2 percent.
Investors instead bought gold, US Treasuries and German government bonds - some of the safest assets in the world - thrusting gold prices to six-week highs and German 10-year borrowing costs to six-week lows.
U.S. Treasury yields dropped to a seven-month low of 2.129 percent at one stage. It is a move that has come despite the Federal Reserve widely expected to raise U.S. interest rates next week, but also follows a run of weaker-than-expected U.S. data.
Erlam of OANDA said another area for concern is how steady sterling has been - about flat to both the dollar and the euro - potentially a sign of complacency before the election.,
The lead of British Prime Minister Theresa May over the opposition Labour Party ahead of Thursday’s general election has narrowed to just 1 percentage point, according to a poll conducted before the attacks in London on Saturday.
Other polls in recent days have found bigger leads for the Conservatives of up to 11 and 12 points.
The dollar, meanwhile, touched a seven-month low ahead of Comey’s testimony.
Reports suggest the former FBI chief plans to talk about conversations in which U.S. President Trump allegedly pressured him to drop his investigation into former national security adviser Mike Flynn, who was fired for failing to disclose conversations with Russian officials.
The dollar index, which tracks the currency against a basket of trade-weighted peers, fell to its lowest level since the November U.S. election.
Data on Monday showing U.S. services sector activity slowing in May as new orders tumbled also hit the greenback.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Nichola Saminather; Editing by Mark Heinrich)