European Markets Leap on French Election Results -- 4th Update
Investors plowed into European stocks, the euro and a broad spectrum of so-called risky assets Monday as results from the first round of French presidential elections eased concerns about the future of the eurozone.
The Euro Stoxx 50 index of eurozone blue-chips climbed 3.9%, as a jump in bank shares put it on track for its best day in nearly two years. Futures on the VSTOXX, which measure the cost of insuring against swings in Europe's stocks, fell over 15%.
France's CAC 40 index surged 4.5%, on track for its highest close since 2015, while Germany's benchmark DAX index added 3%, on pace to notch a fresh record, according to FactSet.
Independent centrist Emmanuel Macron won the first round of Sunday's vote in France, knocking leftist Jean-Luc Mélenchon and conservative François Fillon out of the running.
"The market is ready to bet Macron will be the next president of France, " said Nomura strategist Jordan Rochester.
Mr. Macron will compete against National Front leader Marine Le Pen, who campaigned to take France out of the euro, in the second round on May 7. Polls, which were largely accurate in predicting the first round outcome, suggest he is likely to win.
The euro was last up 1.3% at $1.0865 after touching a five-month high on Sunday. Eurozone bank shares, which were seen as vulnerable to a victory for euroskeptic candidates Ms. Le Pen or Mr. Mélenchon, jumped on Monday. Shares in France's Société Générale and Crédit Agricole were up by close to 10%, while Italian lender UniCredit added 10.7% and the wider eurozone banking sector was up 6.7%, poised for its best day in a year.
"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.
Mr. Dyer said the result should increase appetite for borrowing and investment in Europe at a time when economic growth and earnings are already picking up. Germany's Ifo institute said Monday that its business climate index rose to a multiyear high in April.
"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," said Mr. Dyer said, who holds an overweight position on European stocks.
Futures pointed to a 1.2% opening gain for the S&P 500, with bank stocks leading gains in pre-market trading. In the U.S., risk sentiment is expected to be tempered somewhat this week by the prospect of a looming deadline to avoid a government shutdown and an uncertain policy mix, analysts said.
As investors dialed down fears of a French exit from the currency union, the gap between 10-year French and German government bonds narrowed sharply to its lowest since late 2016, while the gap between German and Italian debt diminished. Investors had worried that an upset in France could hurt fragile economies in the eurozone in the event of a euro breakup.
Investors also largely judged that calm in France would make the European Central Bank more likely to ease its stimulus policy in the coming months. Benchmark 10-year French government bond yields fell to 0.765% Monday from 0.883% Friday, while Italian yields fell to 2.179% from 2.273% and German yields rose to 0.335% from 0.240%, according to Tradeweb. Yields move inversely to prices.
Relief also spread to stocks in Italy and Spain, with Italy's FTSE MIB stock index up 4% and Spain's IBEX up 3.3%.
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, 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. Italy holds primaries later in April, determining who is expected to face the populist 5 Star Movement in coming elections.
Earlier, Hong Kong's Hang Seng Index added 0.4% while Australia's S&P ASX 200 added 0.3%.
A pullback in the yen boosted Japanese stocks, with the Nikkei Stock Average gaining 1.4%. The dollar was last up 1.1% against the yen, while the euro was up 2.3% against the Japanese currency.
Other risk-sensitive assets also notched sizable moves. Gold, which is sometimes held as a hedge in times of market stress, fell 1.3% to $1,272.90 a troy ounce, while 10-year Treasury yields climbed to 2.299% from Friday's 2.234%.
Brent crude oil futures, which slid Friday to cap a 7% decline for the week, rose 0.9% to $52.43 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 fell 1.4%.
Ese Erheriene, Emese Bartha, Nina Adam, Kosaku Narioka, Shen Hong and Gregor Stuart Hunter contributed to this article.
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(END) Dow Jones Newswires
April 24, 2017 07:12 ET (11:12 GMT)