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Risk is gone, impulse can come from anywhere

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Political risk premium has evaporated completely after the first round of French elections. The best evidence for it is the pricing of German bonds compared to the French, which is at ist natural, consistent with fundamentals levels.

For a short period of time, the French 10y bond's yield has exceeded the Germany's by 75 bp. This state of affairs shows that investors dumped the french bonds before the French elections in fear of Le Pen's victory. At the same time, the most secure from political and credit risk, Germany's bonds gained on popularity.

source: Bloomberg

After the elections, the bond yields difference has narrowed by 20 bp resulting in the strong raid of European indices, which motor drive was a financial sector. EUR was also supported, EUR/USD is above 1.09 and EUR/JPY is near 121.50. 

source: Bloomberg

Investors are not afraid, that changes in French political scene will result in the crisis in EU and to the disintegration of the Eurozone. It is worth noting that the actual yield spread does not differ from the average from recent months by more than one standard deviation. It does mean that changes in the bond market have given a strong one-time impulse for the equity market and EUR rally. For this trend to be continued, signals from the real sphere of the Eurozone are needed for ECB to quickly normalize the monetary policy: the continuation of economic revival, improvement of labor market's condition in peripheral economies of Eurozone and appearance of the durable, inflationary pressure stemming from something more than rebound of fuel prices.

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