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ECONOMY

European markets rally amid French first-round election results

The DAX index curve is displayed inside the Frankfurt Stock Exchange in Frankfurt, Germany on Monday

European markets rallied early Monday following the outcome of the first round of the 2017 French presidential election, with money management executives largely positive on the outlook for Europe.

In a surprise result, both of the country's mainstream parties — the Republicans and the Socialists — were eliminated in the first round. Emmanuel Macron, leader of En Marche, won almost 24% of the vote, and Marine Le Pen, leader of the National Front party, took around 21.5% of the vote. The two will go through to the final round of elections on May 7.

Following the results, the EuroStoxx index was up more than 3% and French equity futures were up more than 5%, said Steven Bell, chief economist at BMO Global Asset Management, in a reaction statement. At 11 a.m. EDT, the EuroStoxx 50 was up 3.86% vs. market opening in Europe. The euro had risen 1.27% vs. the dollar to about $1.09, and the yield on the French 10-year government bond was up 1%.

“With Macron heavily favored in head-to-head polling against Le Pen, it seems most likely that the negative market scenarios — priced in over recent weeks — will recede between now and the run-off,” said Timothy Graf, head of macro strategy Europe, Middle East and Africa at State Street Global Markets, in a statement. “As volatility subsides, spreads between French and German yields should narrow and we look for the euro to build on its recent stability against the dollar.”

Money managers also expect risk assets to rally. “Le Pen will almost certainly be defeated in two weeks' time, and equities can continue to rally going into 2018 as non-existential risks can be absorbed,” said Bill Street, head of investments for EMEA at State Street Global Advisors, in the same statement.

BMO's Mr. Bell added that a “sigh of relief will be heard far beyond Europe. Risk assets will enjoy a marvelous Monday,” but warned problems in the eurozone remain. He said while the potential for a populist outcome in Italy next year and unemployment remains high, “a serious hurdle has been overcome and we expect European equities to perform strongly from here.”

In a separate reaction statement, Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, said he expects the upside to the euro “to be contained to around 2% to 3% on a trade-weighted index basis as euro pricing never strongly reflected a Le Pen victory.” He expects French sovereign bond spreads to narrow vs. German bunds, and “substantial upside to European equities as attention turns toward the healthy economic recovery currently taking place in the region.”