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European stocks start week on the front foot

Monday 19:00 GMT

Overview

European and Asian stocks started the week on a mildly firmer note while the dollar put in a mixed performance as the closure of US markets for Presidents’ Day kept activity relatively light.

Friday’s record close for the S&P 500 offered support to European equity markets and offset the impact of a sharp fall for Unilever after Kraft Heinz withdrew its $143bn offer for the Anglo-Dutch consumer goods group.

Hot topic

Eurozone government bond markets saw plenty of action as concerns about the forthcoming French presidential election resurfaced.

Indeed the latest bout of anxiety helped drive the spread between France’s 10-year government bond yield and that of Germany to the widest since August 2012.

The move followed an opinion poll showing Marine Le Pen, the anti-EU far-right candidate, narrowing the gap with her rivals.

James Stretton at JC Rathbone Associates noted that it was widely assumed that the French electorate would overwhelmingly back Ms Le Pen in the first round of the vote as a protest, before “swinging sharply back to reality” in the second round. “The financial markets seem to regard Ms Le Pen’s second-round failure as inevitable,” he said.

The size of the French-German spread “hardly reflects the risk of a Le Pen victory”, he added. “It is worth reminding oneself that a Le Pen victory would mean the end of the EU and the euro as we know them.”

But there was some “relatively good news”, Mr Stretton added. “There is still time to prepare for a seismic French shock.”

The yield on French 10-year debt rose as much as 10 basis points to 1.14 per cent, according to Reuters data, before closing at 1.07 per cent, up 3bp rise for the day.

Germany’s 10-year yield ended flat at 0.30 per cent. The spread between the Bund and the French bond briefly exceeded 0.81 per cent.

Divyang Shah, global strategist at IFR Markets, highlighted action at the so-called front end of the eurozone curve, as the yield on the two-year German Schatz yesterday closed at a record low of minus 0.84 per cent, down 2bp on the day.

“Since January 25, when French prosecutors opened a probe into the fake jobs allegations against presidential candidate François Fillon, the French two-year yield has increased by 10bp while Italy’s has risen 13bp,” he said.

“During this period the yield on the German Schatz has fallen 16bp, while the yield on two-year Austria, Netherlands, Finland and Belgium are 10bp-13bp lower .

“These are worrying signals from the front-end of the eurozone bond markets and the early signs of fragmentation as well as redenomination risk being priced into the market will be a concern to the European Central Bank.”

Meanwhile Greek yields fell sharply after Athens reached agreement with eurozone finance ministers to resume negotiations over the bailout review following a meeting in Brussels.

Teams from the EU and International Monetary Fund will carry out technical talks to lay the groundwork for more ambitious negotiations to resolve differences over debt relief, budget targets and economic reforms, according to Jeroen Dijsselbloem, chairman of the eurozone ministers.

According to Reuters data, the Greek 10-year yield fell 20bp to a still-elevated 7.54 per cent in after-hours trading, leaving it 36bp down from Friday’s close.

The Greek two-year yield was down 18bp from Friday’s finish at 9.72 per cent.

Equities

The pan-regional Stoxx 600 equity index ended 0.2 per cent higher,

while the FTSE 100 in London ended flat. In Paris the CAC 40 index slipped 0.1 per cent.

In Tokyo trading volumes were the lowest for more than a month — and turnover the weakest since mid-December — as the broad Topix index edged up 0.2 per cent.

Hong Kong’s Hang Seng index added 0.5 per cent to close at its best level since August 2015, while in mainland China the Shanghai Composite gained 1.2 per cent following reports that large pension insurance funds were moving into the market, according to Reuters.

Forex

Action in the currency markets was also subdued, with the dollar inching up 0.2 per cent against the yen to ¥113.11 but sterling climbing 0.4 per cent versus the US unit to $1.2456.

The euro was flat against the dollar at $1.0612 — despite renewed concerns about the outcome of the French presidential election

Commodities

Oil prices edged higher as optimism following production cuts was reined in by worries about growing US output and stockpiles.

Brent, the international crude benchmark, was up 0.5 per cent at $56.10 a barrel while West Texas Intermediate, the US marker, was 0.5 per cent higher at $53.69.

Industrial metals were also mostly higher. Copper rose 1.9 per cent in London to $6,070 a tonne, with support coming from disruptions to supplies.

Gold was up $3 at $1,238 an ounce.

Additional reporting by Peter Wells in Hong Kong

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