London - Greek and French election results rattled investors
on Monday by undermining confidence in the region's plans to cut spending and
tackle its debt crisis, sending the euro to a three-month low.
European shares also initially traded lower, with Greek
stocks down 6.4%, but reaction was muted with the UK market closed for a
holiday. Wall Street stocks were expected to reflect the weaker tone when they
Investors sold bonds of other weaker eurozone member states
after the two pro-bailout parties in Greece failed to win a parliamentary
majority, rekindling fears over the country’s future in the single currency.
“The Greek election outcome is the ultimate Greek tragedy.
Not having a cohesive government means the IMF will not release further funds.
Without those funds, Greece will have to leave the eurozone,” Louis Gargour,
chief investment officer of London-based hedge fund LNG Capital, said.
After the more widely expected result, French Socialist
Francois Hollande’s victory over Nicolas Sarkozy, demand for the government’s
debt pushed the yield on 10-year bonds to 2.79%, it lowest in seven months.
But the gains may be only temporary and much will depend on
how the new French President handles relations with Germany’s Chancellor Angela
Merkel over German-led austerity measures, which the markets favour.
“Hollande’s victory marks a turning point in the EU policy
debate,” Tristan Cooper, sovereign debt analyst at Fidelity Worldwide
“Despite professed sympathy for the growth dilemma, markets
will punish any government that strays from its fiscal targets,” Cooper said.
“Spain and the Netherlands were recently at the sharp end of the stick.”
The potential for greater uncertainty in the European
currency bloc’s approach to its more than two-year old debt crisis comes after
Friday’s US nonfarm payrolls report dealt a heavy blow to hopes of a further
strong recovery in the world’s largest economy.
“The election results at the weekend are not helpful to
calming the worries already in the market after disappointing (US) payrolls
report on Friday,” said Gerhard Schwarz, head of equity strategy at Baader
World equities reflected the worsening outlook, falling 0.6%
to 14-week lows at 319.70 points after Wall Street posted its biggest weekly
decline of the year, following the jobs data which showed US hiring slowed for
a second straight month.
The eurozone's blue chip Euro STOXX 50 index opened down
1.1% to 2,222.37, its lowest level for the year, on the French and Greece
votes, but later recovered to be virtually unchanged.
The euro touched a low of $1.2955 in Asian trading as the
election results become clear, but with the key UK market closed, it climbed
back to trade around $1.3035, still at the bottom of its trading band between
$1.30 and $1.35 seen since February.
Peripheral bonds hit
Europe’s sovereign debt markets were most affected by fears
over the future of the region’s fiscal austerity policies, with investors
fleeing to safe-haven German government bonds.
German Bund futures hit record highs of 142.44, up 14 ticks,
while investors sold Spanish and Italian bonds.
Cash 10-year German yields were 2 basis points lower at
1.56%, within a whisker of the record low.
Bond investors were expected to keep away from other
peripheral eurozone markets in coming days as they watch efforts to form a
ruling coalition in Athens.
Spain has become the recent focus of the debt crisis and
industrial output for March confirmed the economy’s weakness. The government is
expected to announce a rescue plan for ailing Bankia as part of a wider reform
of the banking system, sources said on Monday.
The Spanish government 10-year bond yield was little changed
at 5.8%, but some analysts expected it could re-test the psychologically
important 6% level.
In commodity markets the surprisingly weak non-farm payrolls
report for April fueled fears of a drop in global demand, helping send Brent
crude oil below $113 a barrel, its lowest since late January.
US crude futures were down 61 cents at $97.88 a barrel,
after dropping to as low as $95.34, its weakest level of the year.
Spot gold was virtually unchanged at $1 639.60 an ounce,
with prices seen getting some support from jewellers in India, the world’s
biggest buyer of bullion, after the government there decided to scrap an excise
duty on jewelry it imposed in March.