By Mike Bird, Jon Sindreu and Marcus Walker
The ascension of centrist Emmanuel Macron as the heavy favorite
in France's presidential race spurred investors to set aside the
political worries that have long plagued European markets and to
make new bets on economic growth.
Mr. Macron is now seen as the leader in May 7's runoff against
second-place finisher Marine Le Pen, whose pledge to dismantle the
euro had damped prices of euro assets and the common currency
itself.
The former investment banker's good showing sent stocks and the
euro sharply higher while triggering a sharp selloff in German
government bonds, which investors had bought as a haven from
populist politicians such as Ms. Le Pen. Mr. Macron won the first
round with 24% of the vote, according to an official tally, ahead
of Ms. Le Pen with 21.3%.
From Europe's trading floors to its chancelleries, hopes are
rising that the continent can emerge from nearly a decade of
crises.
The euro currency zone has struggled more than any other world
region to recover from the global financial crisis. It was still
emerging from its long slump when a major migration wave further
boosted antiestablishment politicians such as Ms. Le Pen who want
to reverse Europe's deepening integration.
Sunday's French vote showcased the nationalist challenge to the
status quo, but also the strength of a gathering backlash from
broadly centrist voters who want to defend the European Union and
the euro.
A long-awaited strengthening of Europe's economic recovery is
adding to the sense that the continent may be over the worst of its
troubles. Investors are now clearly betting against a political
earthquake that brings down the euro or the EU.
The euro strengthened more than 1% against the dollar Monday to
above $1.08. France's stock market rose 4.1%, led by its big banks.
The Dow Jones Industrial Average rose 1.1%.
One clear sign of the market's growing optimism was the rise in
yields of German bonds, indicating that investors believe that the
strengthening eurozone economy will allow the European Central Bank
to reduce its monetary stimulus measures, including bond
purchases.
But Europe's political uncertainty hasn't suddenly disappeared.
Ms. Le Pen can still win the presidency. Antiestablishment,
euroskeptic parties have a shot at winning Italian elections due in
early 2018.
Even if Ms. Le Pen doesn't win the presidency, the popular
discontent with governing elites that she tapped is likely to
linger -- and could return with a vengeance if Mr. Macron fails to
overcome France's sense of national malaise.
And the May 7 election might yet prove tighter than many expect.
Ms. Le Pen now has two weeks to frame her duel with Mr. Macron as a
plebiscite on globalization and the status quo -- neither of which
are popular in France.
What's more, many Europe-watchers have long viewed Italy as the
place where the eurozone could crack. The country's deep-seated
economic stagnation has fragmented its political landscape and
weakened public support for the euro.
"It is probably too early for markets to see a big relief rally
just yet, " said Anna Stupnytska, global economist at Fidelity
International.
Still, Mr. Macron is the clear favorite to become French
president, with opinion polls putting him ahead by 20 percentage
points or more.
Some investors say Europe's stabilizing politics could even turn
the region's economic recovery into a boom.
"This allows investors to get back to the basics, to think about
economic fundamentals and how it affects monetary policy," said
Paul Meggyesi, a foreign-exchange strategist at J.P. Morgan. "Given
how mispriced European assets are, there's scope for significant
moves," he said.
German and other northern European bonds considered havens sold
off sharply Monday. Gold, another haven that has benefited from
concern over political risk, fell 1.52% in the wake of the French
vote.
French government bonds, meanwhile, rallied alongside those of
Italy, Spain and Portugal, the three European markets that
typically sell off when investors are concerned about a eurozone
breakup.
Investors' nerves had already been soothed somewhat by a
mid-March election in the Netherlands that saw the defeat of
anti-euro populist candidate Geert Wilders. And in Germany, support
for the euroskeptic Alternative for Germany party ahead of the
Sept. 24 election is now below 10%.
"The perception that the center, the establishment, is
reasserting itself is good for investors," said Kevin O'Nolan,
portfolio manager at Fidelity International.
Eurozone business surveys published by Markit on Friday
indicated activity is at its strongest level in six years. The
region's unemployment rate, at 9.5%, is the lowest since May 2009
and consumer prices rose 1.5% in March from a year earlier, not far
from the central bank's target of close to but below 2%.
Investors had always seen Mr. Macron as one of the more
market-friendly candidates in the French election -- and as the
foremost supporter of deeper eurozone integration. During the
campaign, he backed a dedicated budget and parliament for the
currency bloc. After the vote, spokesmen for German Chancellor
Angela Merkel and European Commission President Jean-Claude Juncker
threw their support behind him.
As the country's economy minister, from 2014 to 2016, Mr. Macron
made it easier for employers to lay off workers. His policies
include corporate tax cuts and an additional EUR50 billion ($54
billion) program of public investment.
Market-oriented overhauls of French labor laws, taxation and
other areas could boost the country's long-term growth potential,
many economists say. The country's problem since 2011, however, is
that it has been growing well below its potential. France's
sluggish recovery since the height of the eurozone crisis has
deepened the longstanding sense of national unease.
Victory for Mr. Macron could, by removing political uncertainty,
unleash some of the "animal spirits" that have been lacking from
France's recovery in recent years, says Nicolas VĂ©ron, an economist
at Brussels think tank Bruegel.
Inflows into Europe's equity markets have already been picking
up, according to data provider EPFR Global. Investors have moved
about $5 billion into European equities since the beginning of the
year, with a rise in inflows in the past four weeks.
As the eurozone's economy gathers steam, the ECB may start
acting.
ECB policy makers have been wary of signaling an end to their
monetary stimulus amid the risk posed by the rise of
euroskepticism. Mr. Macron's first-place finish puts a reduction of
stimulus back on the agenda, investors say.
"The focus will now shift to the improving eurozone economy and
the prospect of the European Central Bank beginning to withdraw
monetary policy stimulus," said Anthony Doyle, fixed-interest
investment director at M&G Investments.
Still, while the central bank has already moved to curb its
stimulus in recent months, by slowing its bond purchases and
phasing out a series of free loans, ECB chief Mario Draghi warned
in Washington Friday that underlying inflation in the eurozone was
too weak and the bloc's economy still needed "very substantial"
support from the central bank.
--Tom Fairless contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com, Jon Sindreu at
jon.sindreu@wsj.com and Marcus Walker at marcus.walker@wsj.com
(END) Dow Jones Newswires
April 24, 2017 20:09 ET (00:09 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.