By Jemima Kelly
LONDON (Reuters) - The euro surged in early trading in Asia on Sunday, while French bond yields were expected to fall and French stocks to rally on Monday morning, on relief that France had not been left with a choice between two radical, anti-EU presidential candidates.
Multiple projections showed centrist Emmanuel Macron and far-right leader Marine Le Pen set to face each other in a May 7 runoff for the French presidency, after coming first and second in Sunday's first round of voting.
Investors' greatest worry had been that the far-left, eurosceptic Jean-Luc Melenchon, who had surged in the polls in recent weeks, could jump ahead of Macron and make it into the final run-off against Le Pen, giving voters the choice between two radical candidates who would threaten the future of the EU.
That this worse-case scenario looked likely to have been averted, therefore, was seen as positive for risk sentiment. While Sunday's results looked broadly in line with polls, failures to predict the outcome of the Brexit referendum and U.S. elections had shaken investors' trust in them.
And while the anti-EU Le Pen looked likely to have made it through to the second round, polls have consistently shown Macron will beat her in the runoff.
"The assumption now is that centrist voters will rally around Macron, denying Le Pen the presidency and hence this will effectively be a pro-establishment, pro-European result which will be positive for risk appetite on Monday morning," said Rabobank's head of rates strategy in London, Richard McGuire.
"We are likely to see a notable tightening of European sovereign spreads and this would also be positive for the euro and stocks," he said, although he added that the exit polls must be viewed with a degree of caution.
The spread between French 10-year government bond yields and their German equivalents has been a key gauge of investor sentiment around the French election in recent months.
That gap was widely expected to narrow on Monday as investors buy back into French debt, and as safe-haven German Bunds are sold off on higher risk appetite.
FREXIT FEARS FADE
The euro jumped as much as 2 percent to $1.09395 , its highest level since Nov. 10, the day after the results of the U.S. presidential election, as some markets opened in Asia.
Against the yen, which investors tend to flock to when they perceive high levels of risk, the euro jumped as much as 3 percent to trade at a five-week high of 120.905 yen .
"I think people will be fairly confident that Macron will win in the second round, and the market will be relieved by that," said Insight fund manager and head of currency investment in London, Paul Lambert.
"The euro will benefit from the perceived decline in the break-up risk in the euro area," he added, though he said the single currency's moves would be limited by the fact that this outcome had been expected.
French and European equities were expected to rally when they begin trading on Monday morning, while peripheral bond yields were expected to fall as investors regained their risk appetite.
The projected result will mean a face-off between politicians with radically contrasting economic visions. Macron favours deregulation measures that will be welcomed by financial markets, while Le Pen wants to ditch the euro currency and possibly pull out of the EU - markets' biggest fear.
Even if Le Pen springs a surprise on May 7, her "Frexit" ambitions will require constitutional change which experts say will be difficult, especially as her National Front party only has a handful of federal lawmakers and is seen as highly unlikely to win anything like a majority in June's parliamentary elections.
June's legislative elections also pose a challenge for Macron, who wants to win a parliamentary majority with his brand-new party "En Marche!" ("Forward!")
"We can now conclude that (Frexit) is off the table, assuming that most people will now regard Mr. Macron as the likely winner of round two," said Marie Owens Thomsen, head of economic research at Indosuez Wealth Management in London.
"But, the open question is still the June parliamentary election, what the future president's government will look like and whether or not he will have a majority."
(Reporting by Jemima Kelly; Additional reporting by Maya Nikolaeva in Paris, Dhara Ranasinghe, Helen Reid and Nigel Stephenson in London, and Jonathan Spicer in Washington, DC; editing by Susan Thomas)