Europe stock gains led by banks
Risk of France exiting the European Union abated significantly following the first round of voting on Sunday
Banks dominated European stock gains in the wake of the French elections, with Germany’s Commerzbank up 9.5% and Deutsche Bank up by 7.5%. The big French banks gained 8% to 10%.
Banks did best because they were most affected by the threat to the Eurozone. The prospect of a French withdrawal from the European Union–raised by National Front candidate Jean-Marie Le Pen–would have devastated the credit of borrowers in France and in Europe’s Club Med periphery. If France were to abandon the Euro (for example) and adopt a new and devalued French franc, the dollar and Euro debt of French firms would soar relative to their devalued earnings.
European credit was also a huge winner, with the cost of credit default swap protection on a basket of “crossover” (borderline high yield) names falling from +68 basis points above the interbank rate to +62.