European Stocks and Euro Rally After French Vote: Markets Wrap

(Bloomberg) — European stocks and the euro rallied on speculation Marine Le Pen’s far-right party will struggle to win an outright majority in French elections, easing investor concern that the region’s second-largest economy was headed for a more radical policy shift.

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France’s CAC 40 Index jumped 2.6% after the first round of voting showed Le Pen’s National Rally leading President Emmanuel Macron’s centrist alliance by a smaller margin than some polls projected. A very strong showing for her party would have increased the odds of expansive fiscal policy in France, whose deficit already exceeds what’s allowed under European Union rules.

Europe’s Stoxx 600 Index climbed 1%, with banking stocks leading the advance. Societe Generale SA jumped 7.5%, while Credit Agricole SA rallied 5.1%. US equity futures were higher, signaling a positive opening on Wall Street later.

The euro climbed to its strongest level since mid June and the spread between yields on French 10-year bonds and equivalent German debt narrowed to the lowest in two weeks, reflecting a reduction in risk perceptions.

There is a sense of relief “that the far-right parties did not get the kind of majority that was feared,” Charu Chanana, a market strategist for Saxo Capital Markets in Singapore, told Bloomberg Television’s David Ingles and Stephen Engle.

France’s second round of voting will be held on July 7. The French political world is now embarking on a period of horse-trading. In constituencies where three people qualified for the runoffs, the third-placed candidate can withdraw to boost the chances of another mainstream party defeating the far right.

“With the result still uncertain for the second round, we are not in a rush to buy France and French names,” said Mohit Kumar, a strategist Jefferies. “However, an event risk is likely out of the way with an even more reduced probability of a Frexit scenario. The results are better than fears that neither far right nor the far left would have a free mandate to implement extreme policies. Hence, the immediate reaction is one of a relief rally.”

Japan’s Tankan

Asian shares gained, with South Korea’s benchmark gaining alongside Japan’s Topix. China’s 10-year bond yield fell to a record amid pessimism about the domestic economy.

While central banks in Europe have begun easing policy, the door was left open to an interest-rate increase in Japan later this month after data on Monday showed that confidence among Japan’s large manufacturers rose. The yield on the nation’s 10-year bond rose one basis point to 1.06%.

One in three economists surveyed by Bloomberg predicts a rate hike at the Bank of Japan’s next gathering. The yen dropped to the lowest level since 1986 last week, prompting some analysts to flag a heightened risk of a rate move as Governor Kazuo Ueda has pledged to watch the yen’s impact on inflation closely.

In corporate news, Boeing Co. agreed to buy back Spirit AeroSystems Holdings Inc. for $37.25 a share in an all-stock deal that values the supplier at $4.7 billion, unwinding a two-decade separation as the embattled US plane-maker tries to fix is manufacturing defects. The US Justice Department will charge the company with criminal fraud, leaving the firm to choose between pleading guilty or taking the risk of going to trial, according to people familiar with the matter.

A swath of data indicated the US biggest economy is cooling without lasting damage to consumers. US consumer sentiment declined by less than initially estimated on expectations inflationary pressures will moderate and the Fed’s preferred inflation gauge marked its smallest advance in six months. Treasury 10-year notes were little changed on Monday.

“Going into the second half, there’s a lot of election election uncertainty and we think the dollar will be the best risk-off hedge,” Alex Loo, foreign exchange and macro strategist at TD Securities, told Annabelle Droulers and Shery Ahn on Bloomberg Television. “We do like its appeal as a safe-haven currency.”

In commodities, oil edged higher as traders weighed China’s economic outlook and geopolitical risks in Europe and the Middle East. Gold was little changed.

Key events this week:

Eurozone S&P Global Eurozone Manufacturing PMI, Monday
Indonesia CPI, Monday
India HSBC Manufacturing PMI, Monday
UK S&P Global / CIPS UK Manufacturing PMI, Monday
US construction spending, ISM Manufacturing, Monday
ECB President Christine Lagarde speaks, Monday
Bundesbank President Joachim Nagel speaks, Monday
RBA issues minutes of June policy meeting, Tuesday
South Korea CPI, Tuesday
Eurozone CPI, unemployment, Tuesday
Fed Chair Jerome Powell speaks, Tuesday
ECB President Christine Lagarde speaks, Tuesday
Australia retail sales, Wednesday
China Caixin services PMI, Wednesday
Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday
Poland rate decision, Wednesday
US FOMC minutes, ISM Services, factory orders, trade, initial jobless claims, durable goods, Wednesday
ECB President Christine Lagarde speaks, Wednesday
New York Fed President John Williams speaks, Wednesday
Sweden’s Riksbank issues minutes of June meeting, Wednesday
Australia trade, Thursday
UK general election, Thursday
European Union provisional tariffs on China EVs set to be introduced, Thursday
ECB publishes account of June’s policy meeting, Thursday
US Independence Day holiday, Thursday
Thailand CPI, international reserves, Friday
Eurozone retail sales, Friday
France trade, industrial production, Friday
Germany industrial production, Friday
ECB President Christine Lagarde speaks, Friday
Canada unemployment, Friday
US unemployment, nonfarm payrolls, Friday
New York Fed President John Williams speaks, Friday