Markets set for relief rally after Macron's French election win

LONDON, May 7 (Reuters) - The euro topped $1.10 for the first time in six months in early Asian trading on Monday, and riskier assets were expected to rally when other markets open, on relief that Emmanuel Macron had comfortably won the French presidential election.

Pollsters' projections gave the market-friendly, pro-Europe Macron a winning margin of around 65 percent, easily defeating the far-right Marine Le Pen, a nationalist who had threatened to take France out of the European Union.

The centrist's emphatic victory brought comfort to investors and European allies alike, who had been nervous of the risk of another populist upheaval to follow Britain's vote to quit the EU and Donald Trump's election as U.S. president - neither of which had been predicted by pollsters or bookmakers.

Opinion polls, bookies and prediction markets were proved right this time. But analysts and economists said their failure to accurately predict last year's events had meant there had nevertheless been a risk premium priced into French bond yields, the euro and French stocks, and a modest rally would therefore be likely to follow.

Europe's common currency rose about 0.2 percent in early Asian trade to hit $1.1023, its highest since Nov. 9.

"Emmanuel Macron's victory gives markets a much deserved breather from European politics," said Bill Street, head of investments for EMEA at State Street Global Advisors in London.

"This result, combined with last weeks preliminary Greek debt agreement, will be enough to support a short-term relief rally. Looking forward, Macron only offers upside surprises."

The euro's rise was only slight compared with its 2 percent surge on the back of the first-round results on April 23, when polls had been much tighter, and there had been worries that French voters would be left with a choice between two eurosceptic, radical candidates.


Street, and other investors, said markets' focus would now move away from European political risks and towards monetary policy, with the European Central Bank expected to begin scaling back its expansive asset-purchase programme in the coming months as inflation and growth pick up across the euro zone.

The spread between French 10-year government bond yields and their German equivalent - a key barometer of risk sentiment around the French election over the past few months, which had already narrowed after the first round - was widely expected to fall further.

But Franklin Templeton's head of European fixed income, David Zahn, said although French government bonds were likely to benefit short-term from Macron's win, they could underperform over the medium-term as focus shifts away from politics.

Zahn said much would depend on the results of French parliamentary elections on June 11 and 18, adding that there has been little in Macron's manifesto that would suggest he could bring down France's deficit significantly or stem its high debt-to-GDP levels.

"Over the medium term, we'd expect French government bonds could probably begin to sell off once people finally synthesise the full implications of the Macron victory," he said.

The safe-haven yen slipped to a one-year low against the euro and to its weakest against the dollar in seven weeks, with Macron's victory expected to spur broad investor appetite for risk.

Investors said Le Pen's defeat was a sign that the euroscepticism that brought Britain its vote for Brexit had only limited appeal for the rest of Europe, which would come as a relief to markets.

"For Europe, this result and Angela Merkel's strong showing on Sunday in the Schleswig-Holsten state election - mean the core of Europe pulls closer together. Macron wants to improve relations with Germany," said Stephen Mitchell, a London-based fund manager at Jupiter Asset Management.

Mitchell said he expected equities to react positively to the result, though only mildly, with markets eyeing June's legislative elections and Macron's pick for prime minister before becoming too elated.

But despite the fact that Macron now faces the challenge of securing a majority for a political movement that is barely a year old with his En Marche! (Onwards!) party, the parliamentary elections rank far lower than the presidential elections in terms of the acuteness of the risk for markets.

Two-month euro/dollar implied volatility - derived from a currency option that covers both rounds of the legislative elections - fell to its lowest levels since early October last week, having surged to a nine-month high ahead of the first round of the election. (Reporting by Jemima Kelly; Additional reporting by Dhara Ranasinghe and Nigel Stephenson in London, Helen Reid in Paris, and Olivia Oran in New York; Editing by Susan Fenton)