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French bonds, euro climb on election relief

London - French assets surged after a win for centrist Emmanuel Macron and nationalist Marine Le Pen in the first round of the nation’s presidential election provided a market-friendly outcome.

The CAC 40 index of shares jumped to its highest level since 2008, boosted by gains in the country’s banks, while the yield spread between French 10-year securities and benchmark German bunds narrowed to the lowest since January.

A place for Macron in the second round avoids investors’ nightmare scenario of a contest between the anti-euro Le Pen and the Communist-backed Jean-Luc Melenchon.

The euro surged to its strongest level against the dollar since November before paring some of its gains as focus shifted to a proposed US tax cut.

“The outcome of the second round remains unclear, but the “Macron—Le Pen” configuration is seen as the most market friendly and this has been reflected in the investor reaction so far,” said Vincent Juvyns, global market strategist at JP Morgan Asset Management, which oversees $1.8trn globally.

“Macron is seen by many investors and policy makers as pro-EU, moderately reformist and fiscally responsible, so it is not surprising to see a relief rally in equity, foreign-exchange and fixed-income markets in response to his strong first round showing.

Macron, a first-time candidate and political independent, had 23.8% in Sunday’s election and National Front leader Le Pen had 21.5%, according to results from the Interior Ministry based on 97.4% of votes counted. The result lowers risk for the eurozone after a year of polling upsets and political turmoil driving currency volatility, from the US elections to Italian and British referendums.

French 10-year bond yields fell 10 basis points to 0.84% as of 12:23, after touching 0.83%, the lowest level since January 18. The spread versus German bunds narrowed 19 basis points to 50 basis points, having earlier reached 47, the least since January 26.

Fast-money accounts were seen covering shorts in French bonds, with hedge funds selling in Treasuries, said one trader in Europe, who asked not to be identified as they weren’t authorized to speak publicly.

The euro climbed 1.3% to $1.0864, after reaching $1.0937. Hedge funds were seen fading euro gains above $1.09 and have more offers in place at $1.0975 and above $1.10, said traders in London, who asked not to be named because they weren’t authorized to speak publicly. Europe’s shared currency jumped 2.4% to 119.71 yen.

The cost of insuring against losses on French banks’ junior debt fell by the most in almost seven years, CMA data show. Credit-default swaps on Credit Agricole’s subordinated bonds declined 44 basis points to 146 points, BNP Paribas’ contracts tumbled 53 basis points to 155 points and those of Societe Generale dropped 54 basis points to 162 points.

Investor attention will now turn to the second round of voting, for which Le Pen has trailed Macron in most opinion polls by a margin of some 20 percentage points.

If Le Pen were to produce an upset and become president, the euro would tumble to a 15-year low to below parity with the dollar, in a reaction similar to that seen in the pound following the UK’s Brexit vote, according to economists surveyed by Bloomberg.

“All the polls are saying Macron’s got a lead of 20 percentage points in the second round and that’s held steady,” said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. “The only slight concern is that about 40% of the first round voters went for the populist-type candidates between Le Pen and Melenchon.”

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