Euro Hits Five-Month High on French Election Results

By Mike Bird Features Dow Jones Newswires

The euro, French government bonds and European stocks 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 initially 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 0.768% in early trading Monday, a spread of 0.42 percentage point above benchmark German debt. The spread was 0.64 percentage point on Friday.

Meanwhile, the French CAC-40 stock market index surged 4.5% in early European trade, driving the broader Stoxx Europe 600 up 2%.

Holders of European assets had been concerned by the prospect of a strong showing by Marine Le Pen, the far-right 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 by a wide margin.

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"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."

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 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.

Gains in equities Monday were led by eurozone banks, which rose 6.2%, a sign that investors are again eager to bet on risk.

French bank shares, which had been under pressure in the run-up to the vote, were the main beneficiaries. Société Générale SA, Crédit Agricole SA were up almost 9%, as BNP Paribas and Natixis gained roughly 8%.

The difference between yields on sovereign bonds tightened sharply, another indication that traders think risk has abated. The spread 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.

Meanwhile, havens like gold or the Japanese yen sold off. Gold futures were down 1.2% during the European morning.

Political risks, particularly around the French election, have been a major concern for markets this year, especially after the surprise results of last year's U.K. referendum on EU membership and the U.S. presidential election. Some analysts and investors believe that the result of the first round may be a trigger for an increased appetite for European assets.

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.

"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 manages to beat Ms. Le Pen again in the second round of the elections, most analysts expect investors to keep embracing risk in Europe, since economic data has been broadly above expectations. Business surveys in France are hinting at the fastest expansion in nearly six years.

This is likely to boost stocks in the coming months while depressing bonds, investors say, since Mr. Macron's leading position may also give some space for the European Central Bank to roll back monetary stimulus faster than expected.

"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 05:57 ET (09:57 GMT)