European market reboot depends on more than Macron

Emmanuel Macron, candidate in France's 2017 French presidential election, delivers an address for French nationals in London, Britain, February 21, 2017. REUTERS/Toby Melville

LONDON (Reuters Breakingviews) - European investors have cast their vote for Emmanuel Macron. Relief that the pro-European centrist has reached the second round of France’s presidential election triggered a region-wide rally in asset prices on Monday. Yet lingering political threats to the single currency will prevent a return to business as usual.

The market moves reflect the extent to which investors had been perturbed by the rise of anti-EU candidates. The euro jumped as much as 2 percent against the dollar, while the Euro STOXX 50 Index of blue-chip shares rose nearly 4 percent, putting it on track for its biggest daily gain since 2015. Cheer also spread to euro zone bond markets, with the exception of safe-haven German debt. The gap between French and German 10-year government bond yields shrank to 43 basis points - down from 62 basis points on Friday.

Investors now appear to share the confidence of opinion pollsters that Macron will defeat his anti-EU rival Marine Le Pen in the second-round vote on May 7. But they are stopping short of complacency: the gap between French and German bond yields is still one and a half times wider than it was six months ago. And the cost of buying five-year insurance against a French default remains considerably loftier than it was back then.

There are several reasons for caution. The French election campaign has been littered with surprises. Macron must also overcome doubts about his ability to govern if he becomes president. Legislative elections in June are more likely to result in a majority for one of France’s two mainstream political parties, not the 39-year-old’s fledgling En Marche! movement.

The euro faces other hazards, too. Italy’s 5-Star Movement, which wants to hold a referendum on the euro, could put in a strong showing if the country holds early elections. Public finances in Greece, which is on its third international bailout since 2010, remain extremely shaky. What’s more, the end of the European Central Bank’s bond-buying, which is expected to continue until at least the end of this year, could reveal market fault lines hidden by several years of easy money. Even their enthusiasm for Macron cannot persuade investors to ignore all these potential pitfalls.


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