LDN - Business

Political jitters keep euro, French debt under pressure

[February 08, 2017] By Nigel Stephenson

LONDON (Reuters) - Political uncertainty ahead of European elections prompted nervous investors to sell the euro and kept lower-rated euro zone debt under pressure on Wednesday while the price of safe-haven gold hit three-month highs.

Stocks rose in Europe, led by miners after Rio Tinto unveiled forecast-beating profits and a bigger-than-expected dividend.

Three months before the final round of France's presidential election, investors are concerned about the strong showing of far-right candidate Marine Le Pen, who has promised to take France out of the euro zone and to hold a referendum on European Union membership. Several other front runners are in disarray.

French 10-year government bond yields <FR10YT=TWEB>, which move inversely to price, dipped 1 basis point to 1.1 percent but held close to 17-month highs touched on Monday. Low-risk German equivalents <DE10YT=TWEB> fell 2.3 bps to 0.34 percent.

This pushed the gap between the two yields to more than 78 bps, its widest since November 2012.

"With 2 1/2 months to go until the first round of voting, which means there is plenty of time for things to change, it is hard to see spread volatility subsiding for the time being,” UniCredit fixed income analysts wrote in a note.

The premium investors demand to hold low-rated Italian 10-year bonds rather than German Bunds hit its highest since 2014.

Apart from German debt, investors also bought gold, which is seen as a safe investment in uncertain times. Spot gold <XAU=> hit a three-month high of $1,237.90 an ounce

The euro currency weakened a further 0.2 percent to $1.0653 <EUR=> after a sharp fall on Tuesday.

Options markets show the biggest bias for euro weakness against the dollar since late June <EUR3MRR=FN>.

The dollar, whose predicted path higher has been interrupted lately by uncertainty over U.S. President Donald Trump's economic policies, rose 0.2 percent against a basket of other major currencies <.DXY>.

Investors are still waiting to see whether Trump makes good on his campaign pledges to cut taxes and boost spending.

Against the yen <JPY=>, the dollar fell 0.2 percent to 112.12 yen. Sterling was flat at around $1.25 <GBP=D4> but up 0.2 percent versus the euro at 85.2 pence per euro <EURGBP=>.

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"The French political noise has brought the euro down and that has given the dollar a reprieve," said Gavin Friend, a strategist with National Australia Bank in London.

"Markets know that if Trump was to come out and start talking about tax reform and infrastructure spending, the dollar would go up. The dollar rose a long way at the end of last year, it has come back, now we are sitting around waiting for the next steer."

In stock markets, the pan-European STOXX 600 index <.STOXX> rose 0.3 percent while Britain's FTSE 100 <.FTSE> fell 0.2 percent.

The STOXX basic resources sector <.SXPP> rose nearly 2 percent. Rio Tinto <RIO.L><RIO.AX> gained 2.1 percent while fellow miner Anglo American <AAl.L> added 2.3 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.2 percent in late trade, after spending most of the session in negative territory.

Japan's Nikkei <.N225> rose 0.5 percent.

U.S. stock futures pointed to a flat start on Wall Street <ESc1> <1YMc1>.

Oil prices fell after American Petroleum Institute data on Tuesday showed a larger-than-expected rise in U.S. crude inventories and after signs of slowing demand growth in China.

"The API delivered a Goliath crude inventory number ... The second highest on record. The reaction was predictable as the herd, already nervous from the previous day's price action, turned en masse and ran off the cliff," said Jeffrey Halley of futures brokerage OANDA in Singapore.

Copper prices rose 1.7 percent to just shy of $5,900 a tonne after the world's biggest mines said they planned to cut output due to strikes and other issues.

BHP Billiton said it would halt output at Chile's Escondida mines, the world's biggest, and Freeport-McMoRan warned it would scale back activities at its Indonesian mine.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/
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(Additional reporting by Hideyuki Sano in Tokyo, Henning Gloystein in Singapore, Jamie McGeever and Patrick Graham in London; Editing by Catherine Evans)

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