Italian Bonds, Euro Decline as Markets Look Past Macron Victory

  • ECB likely to adjust tapering communication in June: Rabobank
  • Reaction in French bonds muted as Macron win already priced in

How French-German Spread Mirrored Macron Victory

Italian bonds slid, leading losses in peripheral European debt, as markets looked beyond Emmanuel Macron’s victory in the French presidential race to political risks in other parts of the region.

Yields on Italy’s 10-year notes climbed the most in a week, with focus turning to the nation’s indebted banking system and the risk of early elections that could lead to another gridlock with no party wining control of both houses. French bonds were little changed, a muted reaction compared to the rally seen after Macron won the first round, as the president-elect now faces the challenge of winning a majority or at least garnering enough seats in the June parliament election to govern or form a coalition.

The euro fell for the first time in three days amid speculation the easing of French political risks increases room for the European Central Bank to consider scaling back monetary stimulus.

“As the market’s concern as regards the French presidential election eases, attention will turn back toward Italy and the stability of the banking system,” said Matthew Cairns, a strategist at Rabobank International in London.

The euro, which earlier touched a six-month high against the dollar, reversed gains to fall for the first time in three days, as Macron’s resounding victory over far-right candidate Marine Le Pen removed one event risk that could’ve hindered the ECB from paring back its ultra-easy monetary stance.

  • “We expect the ECB to begin the process of adjusting its communication in terms of tapering from June,” Rabobank’s Cairns said; once this process begins, it means “that the biggest buyer in the room is preparing to ease its purchases and thus the support for markets across the euro zone” will be reduced, which will likely weigh on peripheral bonds, he adds
  • The yield on Italian 10-year bonds climbed three basis points to 2.20 percent as of 10:08 a.m. in London
    • Similar-maturity Spanish bonds rose 1 basis point to 1.57 percent while yields on 10-year French bonds slipped 1 basis point to 0.83 percent
  • “Italian political risk and the country’s fragile banking system could move back into focus soon, particularly if the likelihood of early elections in late 2017 rises,” strategists at BlackRock Investment Institute including Richard Turnill write in a bulletin
  • The euro fell 0.4 percent to $1.0957, its first decline in three days
    • Support at 1.0947-51, series of highs post-France first election round and then 1.0906, March 27 high
  • Macron received 66 percent of expressed votes, the French Interior Ministry said, based on 99.99 percent of votes counted
  • Macron’s victory is expected to be seen as a relief but may have only limited positive impact as it’s been priced in by markets after the first-round vote, Morgane Delledonne, fixed-income strategist‎ at ETF Securities, writes in emailed comments
    • “The next decisive step for France will be the Parliamentary elections. The latest polls indicate Macron’s party En Marche to be the first party at Parliament followed with the Republicans”

— With assistance by Vassilis Karamanis, and Stefania Spezzati

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