European Markets Leap on French Election Results -- 3rd Update

By Riva Gold Features Dow Jones Newswires

European stocks and the euro jumped Monday as results from the first round of French presidential elections eased investors' concerns about the future of the eurozone.

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The Stoxx Europe 600 climbed 1.9% in morning trading, led by the banking sector, while France's CAC 40 index surged 4.2%, with both indexes on track for their highest closes since 2015. The euro was up 1.3% at $1.0867 after touching a five-month high on Sunday as preliminary results were released.

Centrist Emmanuel Macron won the first round of this weekend's vote in France, beating out leftist Jean-Luc Mélenchon and conservative François Fillon. He will face off against National Front leader Marine Le Pen, who campaigned to take France out of the euro, in the second round on May 7. Polls, that were largely accurate in predicting the first round outcome, suggest he is likely to win.

"The market is ready to bet Macron will be the next president of France, " said Nomura strategist Jordan Rochester. Investors plowed into European stocks, the euro and a broad spectrum of so-called risky assets Monday amid relief that uncertainty over France appeared to diminish.

Eurozone bank shares, which had been seen as vulnerable in the event of a victory for euroskeptic candidates Ms. Le Pen or Mr. Mélenchon, jumped on Monday. Shares in BNP Paribas and Crédit Agricole were up 8.9% and 8.5% respectively, while Italian lender UniCredit added 9.9% and the wider eurozone banking sector was up 6.2%.

"European banks should be prime beneficiaries of policies that are pro-growth, pro-stimulus, and not protectionist in nature," said Christopher Dyer, director of global equity at Eaton Vance, noting the results should increase appetite for borrowing and investment across Europe at a time when growth and earnings are already picking up.

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As results in round one largely matched pollsters' projections, "it gives a lot of confidence to the market that we have a good feel for the outlook in France and to a large extent puts to bed the Frexit prospect, " he said.

He is currently holding an overweight position on European stocks.

The gap between 10-year French and German government bonds narrowed sharply to as low as 42 basis points from 66 on Friday, according to Reuters, close to its lowest since late 2016. That gap had widened in recent months as investors braced for the possibility that France could be taken out of the euro.

The gap between German and Italian spreads also narrowed Monday as investors had worried an upset in France could hurt fragile economies in the eurozone in the event of a euro breakup. Italy's 10-year yields were last at 2.166% from 2.273% Friday, while German yields were at 0.345% from 0.240%. French yields fell to 0.757% from 0.883%. Yields move inversely to prices.

Credit spreads, European government bond spreads, and stocks in Europe should do well as investors remove hedges put on ahead of the vote, said Patrick O'Donnell, government bond portfolio manager at Aberdeen Asset Management.

"There's still two weeks between now and the second round, but broadly I think the market will move on and start thinking about the next thing in Europe: Italy," he said.

Earlier, Hong Kong's Hang Seng Index added 0.4% while Australia's S&P ASX 200 added 0.3% as investors broadly returned to stocks after the French vote.

A pullback in the yen boosted Japanese stocks, with the Nikkei Stock Average gaining 1.4%. The dollar was last up 1% against the yen, while the euro was up 2.2% against the Japanese currency, though observers attributed some of the common currency's jump to a lack of liquidity.

Other risk-sensitive assets also notched sizable moves. Gold futures fell 1.2% to $1,273.40 a troy ounce while 10-year Treasury yields jumped to 2.306% from Friday's 2.234%.

Futures pointed to a 1% opening gain for the S&P 500.

Brent crude oil futures, which slid Friday to cap a 7% decline for the week, rose 0.9% to $52.41 a barrel. Commodities also benefited from a weaker U.S. dollar. The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was down 0.3%.

Worries over potential government action to reduce market risk sent Chinese stocks lower, however. The Shanghai Composite Index was down 1.4%.

Ese Erheriene, Emese Bartha, Kosaku Narioka, Shen Hong and Gregor Stuart Hunter contributed to this article.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

April 24, 2017 05:20 ET (09:20 GMT)