By Saikat Chatterjee

LONDON, (Reuters) – Market reaction to French President Emmanuel Macron’s win over Marine Le Pen, by a wide margin according to exit polls in Sunday’s election.

The market reaction

Eurozone bond yields, and especially yields on French government bonds will drop on Monday due to relief from Macron’s win. European trading may show a drop of 5-7bps in benchmark 10-year yields, after they reached seven-year highs over the week.

An important spread between the French and German governments is being closely monitored. This gauge indicates French political risks. This month, it reached 54 bps at its April 2020 peak.

Expect the euro to rise. The euro closed Friday close to $1.08095. This is not too far from its two-year low of $1.0758 in April. 14

This is a list of comments from analysts:

LONDON KENNETH BOX, CURRENCY-STRATEGIST SOCIETE GENERAL, KENNETH:

“The Macron win should ease the market. There should be a slight tightening of the spreads between German and French bond yield spreads. French stocks will open slightly higher, but the dollar rate surge last week will affect the euro. In the next few days, the biggest news in Europe will be the increasing likelihood of an oil embargo by Russia.

HOLGER SCHMIEDING CHIEF ECONOMIST BERENBERG LONDON

We can’t predict how large his margin (Macron) will be based on exit polls, but polls indicate a convincing victory and give him momentum for the parliamentary election.

He has the chance to win those elections, and get close to a majority. Therefore, he should have the ability to create a friendly government even if it needs support.

Markets will probably feel a slight relief, as most opinion polls already indicate a victory for Macron. However, we are able to say that this is not a nightmare scenario.

KASPAR HENSE, SENIOR PORTFOLIO MANAGER, BLUEBAY ASSET MANAGEMENT, LONDON:

“We thought that the markets might be a bit complacent heading into the elections, and so we went short on Italian government debt. Although peripheral bonds will continue to be under pressure in the medium-term, relief will come immediately from the Macron news.

OAT bonds could be 10 basis points tighter, and German bund swaps spreads narrowed by 5 basis points. Although the Euro should rise slightly, it will likely move higher over the medium term because of the decreasing short-term risk. Macron still has time to complete more EU reforms on energy, and greater coherence in key sector such as defense.

MARCHEL ALEXANDROVICH EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON

The polls may be good, but they aren’t always reliable. This is what we learned over the years. We are most likely to receive a relief rally. There would have been such an upset if Le Pen won.

“On economy, I find it interesting since Macron cannot run again so that his legacy can be determined in the next 5 years. He is expected to advocate for further reforms, as he will not be in office again in five years. He has the opportunity to promote his agenda so maybe he will be more brave.

While the win is unlikely to have as much impact in 2017, it was a significant victory for an incumbent.

SEEMA SHAH CHIEF STRATEGIST, PRINCIPLE GLOBAL INVESTORS, LONDON

“There will be some relief. The polls have shown a high level of trust, so I don’t expect any major reaction. But the alternative would have been a large reaction in France and Europe.

We could also see some relief in French stocks. However, after this knee-jerk reaction the attention will now turn to the ECB rate outlook. That will be a key driver for European stocks as well as bonds.

MARLENELARUELLE, DIRECTOR – INSTITUTE for EUROPEAN and RUSSIAN STUDIES (GEORGE WASHINGTON UNIVERSITY), WASHINGTON

Macron’s victory in Ukraine is good news for Europe. Macron has been a strong defender and advocate of European unity.

“Le Pen’s election would have set off a collision course to the EU and caused a political crisis both in France (and potentially Europe) where she would have few supporters other than Victor Orban.

“Yet Macron’s victory must be read with some caveats. Le Pen won her greatest score yet, while the abstention rate of young people exceeds 40%. This indicates high levels of distrust in Macron’s leadership.

FREDERIC LEROUX MEMBER of INVESTMENT TAEAM, CARMIGNAC

The markets will be reassured by E. Macron’s win, which is expected to confirm the European dynamics. The euro could emerge as the biggest beneficiary in the near term. It was at its lowest level against the dollar for two years last Friday. There is no reason to anticipate a major outperformance of French or European stocks against the U.S., as the European equity markets have outperformed those in the U.S. over the past few days.

This election was a comfortable one, but the negative impact on markets could be due to Russia’s decision to immediately lift their oil embargo. It would increase inflationary pressures as well as slow down (stagflation) economic growth in Europe.