Euro, European bonds unnerved by French
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[February 07, 2017]
By Jamie McGeever
LONDON (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.
"The 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.
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Traders work at their desks in front of the German share price
index, DAX board, at the stock exchange in Frankfurt, Germany,
February 1, 2017. REUTERS/Staff/Remote
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
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 elsewhere.
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 on Monday.
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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