European shares rose and US stocks hit record highs yesterday, helped by corporate results, while uncertainty about French elections pushed the euro to its biggest loss in about three weeks.
The Dow Jones Industrial Average and the Nasdaq Composite hit record levels, while the S&P 500 was less than three points away from hitting another all-time high.
Fourth-quarter US earnings are estimated to have risen 8.2% — the best in nine quarters. The US trade deficit fell more than expected in December as exports rose to their highest level in more than one-and-a-half years, outpacing an increase in imports.
In Europe, shares also rose on encouraging company updates and gains in mining stocks. However, the increasingly unpredictable French presidential race continued to unnerve investors, driving them away from French government bonds and tipping the euro towards its biggest fall this year.
The euro fell 0.8% to $1.066, its biggest fall since mid- December, before recovering to $1.068. Against sterling, it eased to 85.6p.
“It is clear the euro is vulnerable to political uncertainty,” said Rabobank analysts. “Although opinion polls suggest that [far-right National Front leader Marine] Le Pen will not win the second round of the French presidential election in May, polls have wrongly picked the winners of both socialist and republican primaries.”
Ms Le Pen has said she will fight globalisation and take France out of the eurozone. The premium investors demand for buying French 10-year government bonds over German 10-year bonds rose to 78 basis points, the highest level since November 2012 before easing back a bit. It was 50 basis points only two weeks ago.
Doubts over a rescue package for Greece also stoked concerns over the future stability of the eurozone. The spread between Italian and German bonds widened to 202 basis points, the highest in three years, while the Portuguese-German spread hit 390 basis points for the first time in three years.
“The market is pricing in the tail risk of Le Pen winning the presidential elections,” said DZ Bank strategist Daniel Lenz. The phrase ‘tail risk’ refers to an unlikely but potentially disruptive event.
French finance minister Michel Sapin weighed in yesterday, saying some investors failed to understand France’s electoral system and Ms Le Pen would not win the election.
“Those who, in good faith or by speculation, bet against France because they think Le Pen can win are not only wrong, but I’ll be frank: They will lose a lot of money,” said Mr Sapin.
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