Which Markets Won the Macron Rally? Hint: Not French Stocks

At the start of the year, concerns that anti-European Union politicians could win elections depressed markets across the region. But in May, pro-EU centrist Emmanuel Macron won the French presidency, triggering a rally in the region's stocks, bonds and common currency. Investors anticipated greater political stability and more business-friendly policies across the eurozone, shifting their focus to the improving economy, which grew faster than the U.S. at the start of the year.

Three months into Mr. Macron's presidency, here's a look at some of the market's biggest winners and losers since the two-round vote. Investors are still betting on solid growth, but that isn't doing any favors for French stocks.

Winners

Italian stocks struggled earlier this year, before Mr. Macron's election helped defuse investors' fears of a eurozone breakup and reversed a ballooning yield gap between Italian and German government bonds. Coupled with recent efforts to shore up some of Italy's most troubled lenders, Milan's benchmark stock index has climbed 10% since the first round of the French vote, outpacing its regional peers.

With political worries out of the way and a rush of inflows into European funds, the euro has swelled against the dollar since the French vote. Speculators currently hold the longest position on the euro since 2007, according to data from the Commodity Futures Trading Commission.

When National Front candidate Marine Le Pen or left-wing firebrand Jean-Luc Mélenchon were pulling ahead in the polls, investors dumped French, Italian and Spanish bonds and turned to ultrasafe German debt on worries about the impact of a possible eurozone breakup on Europe's most-fragile economies. But the day after the first-round vote, the difference between French and German yields dropped by the most since the height of the eurozone crisis in 2011, and spreads across Europe have mostly remained compressed since.

Losers

The benchmark index of blue-chip French stocks shot up 4.1% the day after Mr. Macron cleared the first round of the vote as investors bet a reduction of political jitters and an onslaught of business-friendly policies would boost shares of Paris's largest companies. But analysts say there have been few signs of progress on market-friendly policies in France, while a stronger euro has been a headwind for shares of multinationals across the bloc.

Companies on France's CAC-40 index generate 61% of their revenue in Europe, making them vulnerable to a strengthening local currency when overseas revenue is translated back into euros. That compares with 67% for the CAC Mid 60 index, which tracks the second 60 largest and most actively traded shares listed on Euronext Paris, and roughly 80% for the CAC Small index of small companies. Both have significantly outperformed the CAC-40 since the French election.

Investors migrated into the ultrasafe debt of the eurozone's largest economy ahead of the French vote to protect their portfolios against the chance of an outcome that could destabilize the currency area and wider financial markets. But since then, expectations for greater cooperation between France and Germany, weaker demand for haven assets and the prospect of less central-bank stimulus in the months ahead has put pressure on the bund.

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

(END) Dow Jones Newswires

August 15, 2017 09:25 ET (13:25 GMT)