Euro, European bonds unnerved by French politics

NEW YORK (Reuters) – European shares rose and US stocks hit record highs on Tuesday, helped by corporate results, while uncertainty about French elections pushed the euro to its biggest loss in about three weeks.

The Dow Jones Industrial Average and the Nasdaq Composite hit record levels, while the S&P 500 was less than three points away from hitting another all-time high.

Fourth-quarter US earnings are estimated to have risen 8.2% – the best in nine quarters.

The Dow rose 57.95 points, or 0.29%, to 20,110.37 in early afternoon trading, the S&P 500 gained 3.24 points, or 0.14%, to 2,295.8, and the Nasdaq added 17.52 points, or 0.31%, to 5,681.07.

The US trade deficit fell more than expected in December as exports rose to their highest level in more than 18 months, outpacing an increase in imports. The dollar gained 4.4% against the currencies of the US’s main trading partners last year.

GM fourth-quarter net income dropped partly from foreign-exchange losses, and the automaker forecast flat 2017 profit per share despite hefty stock buybacks. Shares fell 4%.

In Europe, shares rose on encouraging company updates and gains in mining stocks. The benchmark STOXX 600 index was last up 0.5%.

However, the increasingly unpredictable French presidential race continued to unnerve investors, driving them away from French government bonds and tipping the euro toward its biggest fall this year.

The euro fell 0.8% to $1.0665, its biggest fall since December 15, before recovering to $1.0688.

“It is clear the euro is vulnerable to political uncertainty,” Rabobank analysts said on Tuesday.

“Although opinion polls suggest that [farright National Front leader Marine] Le Pen will not win the second round of the French presidential election in May, polls have wrongly picked the winners of both socialist and republican primaries,” they added.

Le Pen has vowed to fight globalization and take France out of the euro zone.

The premium investors demand for buying French 10-year government bonds over German 10-year bonds rose to 78 basis points, the highest level since November 2012, before easing back a bit. It was 50 basis points only two weeks ago.

Doubts over a rescue package for Greece also stoked concerns over the future stability of the euro zone.

The spread between Italian and German bonds widened to 202 basis points, the highest in three years, while the Portuguese-German spread hit 390 basis points for the first time in three years.

Oil prices buckled as lower production by OPEC and other exporters was undermined by growing evidence of a revival in US shale production and sluggish demand.

US crude fell 1.83% to $52.04 a barrel. Brent fell 1.47% to $54.90.

US Treasury yields bounced around near their lowest level in more than two weeks at 2.40%.

The dollar rose 0.55% against the offshore yuan. Concerns remain over the speed at which China has depleted its cash resources to defend the currency. Reserves were almost $4 trillion in 2014.