Euro Hits Five-Month High on French Election -- 4th Update

By Mike Bird Features Dow Jones Newswires

The euro and French government bonds jumped sharply in the wake of the first round of France's presidential election, with centrist former economy minister Emmanuel Macron edging out far-right politician Marine Le Pen.

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Europe's common currency rose as much as 1.9% to $1.0935, its highest level against the dollar since November. Against the Japanese yen, the euro surged as high 120.82, up 3.3%. Gains moderated in recent action, with the euro up 1.2% against the dollar and 2.1% against the yen.

Traders drove down the spread between French and German government bonds, which had widened during the presidential campaign. The 10-year French bond yielded 0.76% in early trading Monday, a spread of 0.42 percentage point above benchmark German debt. The spread was 0.64 percentage point on Friday.

Many euro traders--and holders of European assets--had been concerned by the prospect of a strong showing by Marine Le Pen, the leader of the National Front, or by the far-left candidate Jean-Luc Mélenchon. Ms. Le Pen wants France out of the currency union, and Mr. Mélenchon has advocated scrapping some of its core fiscal rules. Both positions, especially Ms. Le Pen's, would spell trouble for the euro and for French government bonds.

Mr. Macron won the first round with 23.9% of the vote, followed by Ms. Le Pen with 21.4%, according to an official tally of 96% of the votes, meaning the pair will head into the second round on May 7. Opinion polls published Sunday suggested Mr. Macron would beat Ms. Le Pen.

"This is the most market-friendly outcome," said Vincent Juvyns, a strategist at J.P. Morgan Asset Management. "A Macron-Le Pen contest in the second round should give Macron a significant majority."

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Conservative François Fillon placed third with 19.9% of the vote and threw his support behind Mr. Macron. Mr. Mélenchon scored 19.5% of the vote and refused to support one of the top two finishers as of Sunday evening.

Mr. Macron's flagship economic policies are generally friendly to financial markets. They include corporate tax cuts and an additional EUR50 billion ($54.5 billion) program of public investment. During his time as economy minister from 2014 to 2016, France put in place the so-called Macron Law to make it easier for employers to lay off workers.

The difference between yields on sovereign bonds issued by France and Germany had widened in recent months ahead of the vote, an indication that traders saw an enhanced--if still tiny--chance that France defaults on its obligations. Other major nations borrow in currencies that they can print; eurozone countries don't. The tightened spread Monday indicated that traders think that risk has abated.

European government-bond markets will render another verdict when they open. They have been closely watched: The difference between yields on sovereign bonds issued by France and Germany has widened in recent months, an indication that traders see an enhanced--if still tiny--chance that France defaults on its obligations. Other major nations borrow in currencies that they can print; eurozone countries don't.

Elsewhere in market action, gold futures declined 0.9% to $1276.40 a troy ounce. Japan's Nikkei Stock Average rose 1.3%.

Mr. Macron's leading position may also give some space for the European Central Bank, which has continued with negative interest rates and large bond purchases, to back off those stimulative policies.

Political risks, particularly around the French election, have been a major concern for markets this year. Some analysts and investors believe that the result of the first round may be a trigger for an increased appetite for European assets.

"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."

Fund managers had already begun to shift toward Europe, with inflows into the region's equity markets picking up, according to data provider EPFR Global.

"After the Dutch election, we've already seen a shift in risk sentiment in terms of the attitude to European equities," said Monica Defend, head of global asset allocation research at Pioneer Investments. (A mainstream center-right party prevailed over an anti-immigrant firebrand in last month's Dutch election.)

Investors have been more cautious about the French election following the surprise results of last year's U.K. referendum on EU membership, and the U.S. presidential election. Sunday's first round may tamp down some uncertainty.

"The most important thing is that it shows the polls are reliable, and that should increase the confidence in the second round results," said Anais Boussie, economist at Credit Suisse.

"You should see Le Pen defeated by around 20 or 30 points--with Brexit and Trump you had a gap of more like five points," she added.

France's latest economic data has exceeded expectations, with business surveys hinting at the fastest expansion in nearly six years. IHS Markit's purchasing managers index for March reached 57.1; anything over 50 points to growth.

"European economic data has been better, stocks are cheaper, and it looked like there could be some sort of relief rally" after the French election, said Jim McDonald, chief investment strategist at Northern Trust.

Corrie Driebusch, Saumya Vaishampayan and Emese Bartha contributed to this article.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

April 24, 2017 03:11 ET (07:11 GMT)