Euro, European bonds
unnerved by French politics
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[February 07, 2017]
By Jamie McGeever
(Reuters) - The increasingly unpredictable French presidential election
race unnerved European financial markets on Tuesday, tipping the euro
towards its biggest fall this year and driving investors away from
French government bonds.
The premium investors demand for buying French 10-year government bonds
<FR10YT=TWEB> over German 10-year bonds <DE10YT=TWEB> rose to 78 basis
points, the highest level since November 2012 before easing back a bit.
It was 50 basis points only two weeks ago.
The dollar recovered from earlier losses to register its biggest gain of
2017 against a basket of major currencies, jumping against the offshore
Chinese yuan after Beijing's foreign exchange reserves fell below $3
trillion for the first time in six years.
European corporate earnings offered investors some cheer - even though
oil giant BP <BP.L> missed estimates - helping to steer U.S. futures
into positive territory. Wall Street was looked set to rise 0.3 percent
at the open <ESc1>.
European trading, however, was dominated by the latest twists in the
French presidential election race, while doubts over a rescue package
for Greece also stoked concerns over the future stability of the euro
"It is clear the euro is vulnerable to political uncertainty," Rabobank
analysts said on Tuesday.
"Although opinion polls suggest that (Far-right National Front Leader
Marine) Le Pen will not win the second round of the French presidential
election in May, polls have wrongly picked the winners of both socialist
and republican primaries," they added.
Le Pen has vowed to fight globalization and take France out of the euro
The election is being stirred by controversy. Conservative candidate
Francois Fillon has vowed to fight on for the presidency despite a
damaging scandal involving taxpayer-funded payments to his wife.
Emmanuel Macron, the independent centrist candidate and current favorite
to win the election, on Tuesday knocked down rumors he has a gay
relationship outside his marriage since 2007.
The euro fell 0.8 percent to $1.0665 <EUR=>, its biggest fall since Dec.
15 last year, while the dollar index was up 0.7 percent, its biggest
rise since Jan. 6 <.DXY>.
The spread between Italian <IT10YT=TWEB> and German bonds meanwhile
widened to 202 basis points, the highest in three years, while the
Portuguese-German spread hit 390 basis points for the first time in
three years also <PT10YT=TWEB>.
The spreads narrowed a bit by the European mid-day.
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acceleration of the trend of wider spreads since the start of the year has been
widespread and not just confined to France, where obviously the political ...
risk is the greatest," said Kenneth Broux, head of corporate research, FX and
rates at Societe Generale.
Investors initially sought the safety of U.S. Treasury and German debt, but
selling pressure mounted as stocks moved further into positive territory. The
dollar's rise dulled the allure of gold, the traditional safe-haven asset in
times of political and economic uncertainty.
The yield on 10-year U.S. Treasuries hit a two-week low of 2.40 percent before
recovering to 2.43 percent <US10YT=RR>.
BELOW $3 TRILLION
European stocks extended gains, with the FTSEuroFirst 300 index of leading
shares up 0.5 percent in early trade at 1435 points <.FTEU3>.
Chipmaker AMS <AMS.S> rose 16 percent, poised for its best-day ever after the
company's fourth-quarter revenue came in at the top end of the chipmaker's
expectations. BP was the biggest drag on the broader index, down 2.5 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell
0.3 percent, while Japan's Nikkei <.N225> closed down 0.35 percent.
Data on Tuesday showed that Chinese FX reserves fell for the seventh straight
month in January and below $3 trillion for the first time in six years.
The dollar rose 0.5 percent against the offshore yuan <CNH=>, its biggest rise
in three weeks. Concerns remain over the speed at which China has depleted its
cash resources to defend the currency. Reserves were almost $4 trillion in 2014.
"The underlying pace of decline in FX reserves was $40 billion in January (vs a
drop of $29 billion in December), suggesting that capital outflows have
accelerated despite tighter capital control measures implemented in late
November," Morgan Stanley said in a note on Tuesday.
Oil prices buckled under the dollar's gains, extending their decline following
the biggest one-day loss since Jan. 18 on Monday as worries about rising oil
supply out of the United States tussled with optimism about output curbs
U.S. crude <CLc1> fell 0.3 percent to $52.86 a barrel, after falling 1.5 percent
on Monday. Brent <LCOc1> fell 0.2 percent to $55.59, after sliding 1.9 percent
Gold fell 0.5 percent to $1,229 an ounce <XAU=>, after hitting a three-month
high on Monday.
(Reporting by Jamie McGeever; Editing by Jeremy Gaunt)
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