LONDON – The euro traded higher and the spread between French and German bond yields tightened on Monday after incumbent French President Emmanuel Macron won a larger than expected share in the first round of the French election.
With 96 percent of the votes counted for Sunday's first round, Macron garnered 27.41 percent of the votes and far-right candidate Marin Le Pen won 24.03 percent. Macron will now go into a runoff against Le Pen on April 24.
A Le Pen victory could send shockwaves through France and Europe in ways similar to Britain's vote in 2016 to leave the European Union.
The first round result saw Macron record a bigger lead than he managed in 2017 but it was close, leaving the euro just 0.3 percent higher on the day at $1.0910 , after it initially rose to $1.0955 overnight then fell to $1.0874.
The French 10-year bond yield was little changed at 1.275 percent, near its highest level since mid-2015 at 1.296 percent that was reached on Friday.
The spread between the French 10-year yield and its German peer narrowed by 4 basis points (bps) to 50.2 bps.
"While Macron's first round lead over Le Pen was bigger than he managed in 2017, polls point to a much narrower race for the second round (53-47 percent)," Danske Bank analysts said in a note.
"With Macron's re-election far from assured, markets will keep a close eye on polls in the coming two weeks."
The mood in equity markets was cautious with the MSCI world equity index, which tracks shares in 50 countries, lower by 0.3 percent.
The pan-European STOXX 600 was lower by 0.7 percent, but outperformance was seen in France's CAC 40, which rose 0.1 percent.
"You have to have a bias to the market overall – the bias in our mind is negative because of this combination of slowing growth, higher inflation and higher yields, tighter financial conditions," said Hani Redha, multi-asset portfolio manager at Pinebridge Investments.
The weakness in markets on Monday could be particularly attributed to the continued sell-off in US Treasuries and Europe's government bonds, he added.
Ten-year Treasury yields rose as high as 2.7840 percent during Asia-Pacific trading hours, the highest level since January 2019, for a 125 basis point rise so far this year.
Markets have raced to price in the risk of larger rate hikes from the Federal Reserve with futures implying rises of 50 basis points at both the May and June meetings.
This underlines the importance of the March US consumer price report on Tuesday where the median forecast is for a leap of 1.2 percent, taking annual inflation to an eye-watering 8.5 percent.