By Mike Bird
The euro, French government bonds and European stocks jumped
sharply after centrist candidate Emmanuel Macron won the most votes
in the first round of France's presidential election, a reaction
that may herald a broader realignment of European markets recently
plagued by concerns over political risk.
Mr. Macron is the overwhelming favorite to win May 7's runoff
against second-place finisher Marine Le Pen, whose anti-euro stance
had concerned investors.
In afternoon European trading, the euro was up around 1.2% at
$1.084, after touching five-month highs of $1.0935 overnight. The
spread between French and safe haven German government bonds
tightened from 0.64 of a percentage point Friday to as little as
0.42 of a percentage point Monday, the narrowest spread this year.
The French CAC-40 stock market index surged 4.6%, driving the
broader Stoxx Europe 600 up 2.1%.
Some investors believe this relief rally will continue, with an
increased appetite for the euro and European stocks as electoral
worries fade and the continent's improving economy comes further
into focus. The increased appetite for riskier investments such as
shares may hit bonds, which have benefited from haven buying and a
massive European Central Bank bond-buying program that some
analysts believe will be scaled back this year.
"The balance of discourse was just so skewed against the euro,"
said Geoffrey Yu, head of U.K. investment office at UBS Wealth
Management. "As we move away from the politics, we think the euro
is going higher. It's still quite cheap at these levels relative to
long-term averages."
Political risks, particularly around the French election, have
been investors' biggest concern for European markets this year.
That's especially after the surprise results of last year's U.K.
Brexit vote and the U.S. presidential election and after Italians
rejected attempts at political overhaul.
Investors put money into safer investments, including bonds and
German government debt, and often avoided Europe's weaker southern
economies.
German bonds sold off sharply Monday. Yields on 10-year bunds
rose to 0.34% from around 0.245% on Friday. Yields move inversely
to prices. Gold, another haven that has benefited from concern over
political risk, was down 1.52% in the wake of the French vote.
French government bonds, meanwhile, rallied alongside those of
Italy, Spain and Portugal, the three European markets that
typically sell off when investors are concerned over the risks of a
breakup of the eurozone.
Investors had been concerned by the prospect of a strong showing
by Ms. Le Pen, the far-right leader of the National Front, or by
the far-left candidate Jean-Luc Mélenchon. Ms. Le Pen wants to pull
France out of the currency union, and Mr. Mélenchon had advocated
scrapping some of its core fiscal rules, positions that would spell
trouble for the euro and French government bonds.
As recently as last week, some analysts were forecasting the
euro would fall to parity with the dollar, a prediction that has
been popular for more than two years but has yet to happen. After
the French result, Deutsche Bank said it is in the process of
updating its forecasts, which previously had been among the most
bearish and predicted the euro would fall to $0.95 by the end of
2017.
Bank of America Merrill Lynch's prediction that the common
currency will hit $1.05 by the end of 2017 is now more likely to be
raised than cut, said Athanasios Vamvakidis, head of G-10 foreign
exchange strategy at the bank.
To be sure, political and other risks remain in Europe.
Investors see a gamut of problems for Italy, the eurozone's
third-largest economy, with weak growth, banks with bad loans and
sky-high public debt. They also wonder what happens if the ECB
begins to scale back its massive quantitative-easing program, which
has supported the bonds of weaker economies and boosted shares.
"European government bond yields will likely come under pressure
in the months ahead," Anthony Doyle, fixed interest investment
director at M&G Investments, said in an email. "As will
European investment grade corporate bonds that have benefited from
the ECB's bond buying programme."
Ms. Le Pen may also still win. "It is probably too early for
markets to see a big relief rally just yet," said Anna Stupnytska,
global economist at Fidelity International.
But most analysts and polls expect Mr. Macron to win comfortable
May 7, as French voters rally around a candidate who isn't Ms. Le
Pen.
The polls were accurate for Sunday, after getting it wrong for
Mr. Trump's election victory, and that may give investors more
confidence in their prediction of a second-round triumph for Mr.
Macron.
"The most important thing is that it shows the polls are
reliable, and that should increase the confidence in the
second-round results," said Anaïs Boussié, an economist at Credit
Suisse.
Investors' nerves already has been soothed somewhat by a
mid-March election in the Netherlands, when Prime Minister Mark
Rutte beat anti-euro populist candidate Geert Wilders.
Inflows into Europe's equity markets have been picking up,
according to data provider EPFR Global. Investors have moved about
$5 billion into European equities since the beginning of the year,
with a rise in inflows in the past four weeks.
"International investors have been burned a bit in the past few
years, so they've been reticent to get involved," said Kevin
O'Nolan, portfolio manager at Fidelity International. "But the
perception that the center, the establishment, is reasserting
itself is good for investors."
If Mr. Macron becomes president, most analysts expect investors
to keep embracing risk in Europe. Economic data has outperformed
expectations broadly this year. Business surveys in France are
hinting at the fastest expansion for the country in nearly six
years.
This is likely to boost stocks in the coming months while
depressing bonds, investors say.
"We've got three months of market reaction to a more stable
Europe," said Luke Hickmore, fund manager at Aberdeen Asset
Management.
Jon Sindreu
,
Emese Bartha
and Noemie Bisserbe contributed to this article
Write to Mike Bird at Mike.Bird@wsj.com
(END) Dow Jones Newswires
April 24, 2017 09:08 ET (13:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.