Clear Macron win whets appetite for French, South European bonds


UPDATE 2-Clear Macron win whets appetite for French, South European bonds

* President's party wins strong parliamentary majority
    * French/German yield gap tightens towards 7-month lows
    * Focus turns to Macron's reform agenda
    * Brexit talks get under way in Brussels
    * Euro zone periphery govt bond yields

 (Adds Italian and Portuguese bond prices)
    By Dhara RanasingheLONDON, June 19 (Reuters) - The gap between French and
German bond yields held near its tightest level in seven months
after French President Emmanuel Macron won a commanding majority
in parliamentary elections, securing a strong mandate for
pro-business reforms.
    France's 10-year government bond yield was within sight of
seven-month lows and South European government bond yields
dropped on Monday after this Sunday's second round vote.
    Macron's centrist Republic on the Move LREM party and its
centre-right Modem ally won 350 out of 577 seats in the lower
house, fewer than previously forecast. [nL8N1JF02M]
    Record low voter turnout suggested France's new leader, the
youngest since Napoleon, would need to proceed cautiously with
reforms in a country where trade unions and street protests have
in the past forced new legislation to be diluted.
    "He will also face an enormous amount of resistance on the
ground from the vested interests of the trade unions which still
wield an enormous amount of influence, and could make life very
difficult for the inexperienced new President and his party,"
said Michael Hewson, chief market analyst at CMC Markets UK.
    But the scale of his victory gives Macron, a pro-European
Union centrist, a solid platform to carry out his campaign
promises to revive the euro zone's second biggest economy.
    That lifted investor sentiment on Monday, with French stocks
<.FCHI> rallying 1.15 percent and outperforming European peers.
French banking stocks, a barometer of appetite for French
assets, jumped over 1.5 percent <CAGR.PA> <BNPP.PA> <SOGN.PA>
    Berenberg chief economist Holger Schmieding said France
could become the strongest economy in Europe in a decade.

    Sunday's vote also closes a chapter on what has been a
driver of European market risk, given the popularity of
anti-euro far-right leader Marine Le Pen heading into France's
presidential elections in April and May.
    The gap between French and German bond yields - an important
gauge of risk appetite - had widened sharply heading into that
vote but has since tightened.
    The 10-year bond yield gap was at 35 bps on Monday, just 2
bps away from levels hit last week that marked the tightest
since November. The spread is down more than 40 bps from highs
hit in February at the height of French election jitters
    In absolute terms, the yield on France's 10-year government
bond was unchanged on the day, staying within sight of a
seven-month low of 0.58 percent <FR10YT=TWEB> hit last week.
    Italian and Portuguese government bond yields dropped 3-4
basis points on the day, and the gap over the German equivalent
was close to multi-month lows in both cases. <IT10YT=TWEB>
    These bonds tend to rally when risk appetite is strong and
when euro zone break up concerns ebb.
    "What is also important is the composition of the
(parliament)," said Peter Chatwell, head of euro rates strategy
at Mizuho.
    "Having the Socialists lose so many seats means this is
still a very much business- and reform-friendly assembly and
that's why we've been able to see the CAC-40 (stock market)
rally nicely ...while French spreads are still relatively
    Positive developments in French politics contrasted with
turbulence in Britain, where a weakened government on Monday
kicked off divorce talks with the EU. [nL8N1JE0JM]
    For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=

Decision Europe: Full election coverage    cpurl://apps.cp./cms/?navid=72745
 (Reporting by Dhara Ranasinghe, editing by Louise Heavens and
John Stonestreet)
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This article appears in: Stocks , World Markets , Politics
Referenced Symbols: BNPP , CAGR , SOGN

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