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Markets switch to “risk on” after France poll

Monday 08:00 BST

What you need to know
● France presidential poll sparks “risk on” trading
● Hopes Marcron will win second round boosts euro and stocks
● Gold and Japanese yen hit as investors dump haven assets
● German Bund yields jump and French OAT yields drop
● Brent crude leads rally for industrial commodities

Hot topic

A wave of relief is sweeping across markets amid hopes that, following Sunday’s French presidential election, Emmanuel Macron will beat Marine Le Pen to capture the Elysée Palace in a fortnight’s time.

“Yesterday’s outturn was very much as opinion polls had predicted, but markets haven taken comfort from the avoidance of a Le Pen v Mélenchon runoff on the grounds that could have given investors continued concerns about France’s future relationship with the EU,” said Phillip Shaw, economist at Investec.

Mr Macron is a centrist who supports open markets and France staying in the EU, while the far-right Ms Le Pen advocates dumping the euro — a prospect that many investors feared could terminally rupture the eurozone project.

“We expect Macron to win the second round [on May 7] and to become the next French president, on the basis that the candidate closest to the centre of the political spectrum has the best chance to win,” said analysts at Citigroup.

“This outcome is likely to drive “Risk On” in financial markets with European equities higher. Citi Rate strategists expect a sharp fall in French-German bond spreads in the coming days. The Euro is likely to be strong too as fears of a “Risk Off” outcome are also priced out.”


The euro is surging 1 per cent to $1.0833 having at one point in early Asia trading touched a five-month high of $1.0935.

The relief among currency dealers can be seen in the options market, where the cost of hedging against euro/dollar volatility over the next month has dropped by 34 per cent to 8.6.

The market’s more optimistic mood is benefiting those particularly sentiment-sensitive units, boosting commodity currencies like the Australian and Canadian dollars, and lifting by more than 1 per cent the Mexican peso, Turkish lira and South African rand.

The Japanese yen is going in the other direction — down 1 per cent to ¥110.15 — as the currency market’s favoured haven sees less demand. Sterling is another casualty, easing 0.2 per cent to $1.2790 amid lingering Brexit concerns.

Fixed income

French and German sovereign bond prices are moving in opposite directions as investors trim the credit risk premium they had demanded to hold Paris’ debt and see less need to hold Berlin’s “safe” paper.

The 10-year French OAT yield, which moves opposite to the bond price, is down 4 basis points to 0.84 per cent, and equivalent maturity German Bund yields are jumping 9bp to 0.34 per cent.

The yield spread of 50bp is the narrowest in three months. In February the spread was above 82, its widest in four-and-a-half years. Ahead of the second round of the French election in two weeks time, investors must deal with the European Central Bank’s monetary policy decision this Thursday.

US government bonds are also suffering as traders move away from fixed income bolt holes, the 10-year Treasury yield gaining 7bp to 2.31 per cent.


The ebullient mood is extending to most stock markets. France’s CAC 40 is up 4 per cent to an eight-month high as the financial sector surges.

The Euro Stoxx 600 is gaining 1.8 per cent and London’s FTSE 100 is adding 1.8 per cent, helped by a weaker pound and strength in interest-rate sensitive groups such as real estate and banks as bond yields rise.

US index futures suggest the S&P 500 will jump 1.1 per cent to 2,375 later on Wall Street, ahead of a very busy week for first quarter company results.

Earlier in Asia, Tokyo’s Topix index rose 1 per cent as the exporter-sensitive gauge welcomed the softer yen, while South Korea’s Kospi shrugged off continued tensions with the North and gained 0.4 per cent.

Hong Kong’s Hang Seng tracked the broader mood, adding 0.4 per cent, but on the Chinese mainland the Shanghai Composite was a notable underperformer, shedding 1.4 per cent to a 10-week low on expectations Beijing was looking to clamp down on speculative trading.


Gold is down 1 per cent to $1,271 an ounce as it losses some of its haven lustre.

Energy prices are more chipper as fears about an economic slowdown in Europe recede.

The price of Brent crude, the international benchmark, is up 0.7 per cent to $52.31 a barrel, while West Texas Intermediate, the main US contract is adding 0.6 per cent to $49.90.

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