French election fears upset markets once again

Political uncertainty ahead of European elections gave nervous investors a reason to sell the euro and kept French government debt under pressure, while the price of safe-haven gold hit three-month highs.

Wall St stocks opened lower, weighed by losses in the banking and healthcare sectors, and European share prices turned negative, while oil recovered after a surprise draw in petrol stockpiles.

Three months before the final round of France’s presidential election, investors are concerned about the strong showing of far-right candidate Marine Le Pen, who has promised to take France out of the eurozone and to hold a referendum on EU membership. Eurozone government bond yields fell broadly yesterday, though French debt lagged the rest with 10-year yields falling three basis points to 1.1% but remain not far off the 17-month highs touched earlier this week.

Low-risk German equivalents 5.4 basis points to 0.31%, a two-week low. This pushed the spread between the two yields at one point to more than 78 basis points, its widest since November 2012, a move that was also fuelled by expectations that the ECB’s bond-buying stimulus scheme has peaked.

“If you step back, the big picture still remains — that of political concerns in Europe concomitant with speculation over ECB tapering,” said Rabobank’s head of rates strategy, Richard McGuire.

The premium investors demand to hold low-rated Italian 10-year bonds rather than German Bunds hit its highest since 2014. Apart from German debt, investors also bought gold, which is seen as a safe investment. Spot gold hit a three-month high of $1,244.67 an ounce. The euro was down another 0.1% to $1.068 after a sharp fall on Tuesday. Against sterling, it rose slightly, however, to 85.4p. The price of US crude oil was up 44c at $55.61 after news of a large rise in inventories in the US Energy Information Administration data saw prices initially fall overnight.

“The crude oil inventory build was really terrible for the market but the market does not seem to care because the products inventories were better than expected and are dragging crude oil prices up with it,” said Andrew Lipow, president of Lipow Oil Associates in Houston.

The dollar, whose predicted path higher has been interrupted lately by uncertainty over President Donald Trump’s economic policies, ticked higher against a basket of major currencies. Investors are still waiting to see if Mr Trump makes good on his campaign pledges to cut taxes and boost spending.

“Markets know that if Trump was to come out and start talking about tax reform and infrastructure spending, the dollar would go up. The dollar rose a long way at the end of last year, it has come back, now we are sitting around waiting for the next steer,” said Gavin Friend, a strategist with National Australia Bank in London.

Chris Beauchamp, chief market analyst at online broker IG warned about potential disruption ahead.

“The ominous quiet in US markets, where moves greater than 1% continue to be rarer than hens’ teeth, is a signal that something big is on its way. The current flows into gold and treasuries and away from the S&P 500 is another indication that the equity rally is looking exhausted,” he said.

Reuters and Irish Examiner staff



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