By Jemima Kelly
LONDON (Reuters) - European markets were set for some additional relief on Monday after Emmanuel Macron's election as French president, though gains were expected to be limited, given the sizeable moves already seen over the past two weeks as polls pointed to his victory.
The euro topped $1.10 in early Asian trading for the first time since Donald Trump's U.S. election win, but it had slipped back to just below that level by 2220 GMT, and even its earlier peak of $1.1024 represented just a 0.2 percent rise -- a tenth of the size of the move seen in the wake of the first round of the election two weeks ago.
With French political risks -- and the wider threat to the euro zone that came with them -- dissipating, global investors reckon the focus will now switch to the details of Macron's programme and his ability to command workable support for his en Marche! (Onwards!) party in June's assembly elections.
And more immediately important for European markets is the underlying buoyancy of the euro zone economy and the prospects for the European Central Bank further reducing is massive bond-buying stimulus.
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"The focus of investors is turning away from political risks, back to the ECB, what will be its next action, when will it start to unwind its accommodative policy," Michala Marcussen, chief economist at Societe Generale CIB, told Reuters.
State Street's head of investments for Europe, the Middle East and Africa, Bill Street, said the result -- along with a preliminary debt agreement for Greece last week -- would provide a relief rally, though only a short-term one.
If Macron "gets a working parliament and builds a partnership with Germany to launch meaningful reforms", Street said -- which he called the "Goldilocks scenario" -- that would mean further gains for markets by year-end, as that outcome had not yet been priced in.
For now, though, market moves were expected to be modest. The euro recorded its biggest one-day rise since last June after the first round on April 23, and has climbed almost 3 percent since, so fresh drivers are seen as needed for further substantial gains.
Many analysts have said that $1.10 marks roughly the top of where the euro should be trading, given that the ECB is still pumping 60 billion euros into the economy every month, while the U.S. Federal Reserve moves in the opposite direction by tightening policy.
The spread between French 10-year government bond yields and their German equivalent -- a key barometer of risk sentiment over the French election over the past few months, had already narrowed before Sunday's results, with the spread reaching its tightest in six months on Friday. [GVD/EUR]
London-based Jupiter Asset Management fund manager Stephen Mitchell, among others, said that spread should narrow further on Monday, as well as the spread between Italian and German bonds, while equities should also react positively.
But he added that any market reactions were likely to be modest, with investors waiting for June's legislative elections and Macron's pick for prime minister before becoming too elated.
EUROPEAN RECOVERY CYCLE
Erin Browne, head of macro investments at UBS O'Connor, a New York-based hedge fund manager, said despite the fact that Macron's victory had been widely expected, it would nevertheless spur further gains in European stocks.
"Moving past this hurdle will encourage inflows into European risk assets," she said. "The European economic and profits recovery cycle is at a much earlier stage than in the United States, and offers better valuation and upside potential."
Pollsters' projections gave the market-friendly, pro-Europe Macron a winning margin of around 65 percent, easily defeating the far-right Marine Le Pen, a nationalist who had threatened to take France out of the European Union.
The centrist's emphatic victory brought comfort to investors and European allies alike, who had been nervous of the risk of another populist upheaval to follow Britain's vote to quit the EU and Donald Trump's election as U.S. president.
Franklin Templeton's head of European fixed income, David Zahn, said although French government bonds were likely to benefit short-term from Macron's win, they could underperform over the medium-term as focus shifts away from politics.
Zahn said much would depend on the results of French parliamentary elections on June 11 and 18, adding that there has been little in Macron's manifesto that would suggest he could bring down France's deficit significantly or stem its high debt-to-GDP levels.
"Over the medium term, we'd expect French government bonds could probably begin to sell off once people finally synthesise the full implications of the Macron victory," he said.
Investors said Le Pen's defeat was a sign that the euroscepticism that brought Britain its vote for Brexit had only limited appeal for the rest of Europe, which would come as a relief to markets.
But although many pointed to the challenges Macron faces as he tries to form a government with a new party, the parliamentary elections rank far lower than the presidential elections in terms of market risk.
Two-month euro/dollar implied volatility -- derived from a currency option that covers both rounds of the legislative elections -- fell to its lowest levels since early October last week, having surged to a nine-month high ahead of the first round of the presidential election.
(Reporting by Jemima Kelly; Additional reporting by Dhara Ranasinghe and Nigel Stephenson in London, Helen Reid and Maya Nicolaeva in Paris, and Olivia Oran in New York; Editing by Susan Fenton and Sandra Maler)
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