The ascension of centrist Emmanuel Macron as the heavy favorite in France’s presidential race spurred investors to set aside the political worries that have long plagued European markets and to make new bets on economic growth.
Mr. Macron is now seen as the leader in May 7’s runoff against second-place finisher Marine Le Pen, whose pledge to dismantle the euro had damped prices of euro assets and the common currency itself.
The former investment banker’s good showing sent stocks and the euro sharply higher while triggering a sharp selloff in German government bonds, which investors had bought as a haven from populist politicians such as Ms. Le Pen. Mr. Macron won the first round with 24% of the vote, according to an official tally, ahead of Ms. Le Pen with 21.3%.
From Europe’s trading floors to its chancelleries, hopes are rising that the continent can emerge from nearly a decade of crises.
The euro currency zone has struggled more than any other world region to recover from the global financial crisis. It was still emerging from its long slump when a major migration wave further boosted antiestablishment politicians such as Ms. Le Pen who want to reverse Europe’s deepening integration.
Sunday’s French vote showcased the nationalist challenge to the status quo, but also the strength of a gathering backlash from broadly centrist voters who want to defend the European Union and the euro.
A long-awaited strengthening of Europe’s economic recovery is adding to the sense that the continent may be over the worst of its troubles. Investors are now clearly betting against a political earthquake that brings down the euro or the EU.
The euro strengthened more than 1% against the dollar Monday to above $1.08. France’s stock market rose 4.1%, led by its big banks. The Dow Jones Industrial Average rose 1.1%.
One clear sign of the market’s growing optimism was the rise in yields of German bonds, indicating that investors believe that the strengthening eurozone economy will allow the European Central Bank to reduce its monetary stimulus measures, including bond purchases.
But Europe’s political uncertainty hasn’t suddenly disappeared. Ms. Le Pen can still win the presidency. Antiestablishment, euroskeptic parties have a shot at winning Italian elections due in early 2018.
Even if Ms. Le Pen doesn’t win the presidency, the popular discontent with governing elites that she tapped is likely to linger—and could return with a vengeance if Mr. Macron fails to overcome France’s sense of national malaise.
And the May 7 election might yet prove tighter than many expect. Ms. Le Pen now has two weeks to frame her duel with Mr. Macron as a plebiscite on globalization and the status quo—neither of which are popular in France.
What’s more, many Europe-watchers have long viewed Italy as the place where the eurozone could crack. The country’s deep-seated economic stagnation has fragmented its political landscape and weakened public support for the euro.
“It is probably too early for markets to see a big relief rally just yet,” said Anna Stupnytska, global economist at Fidelity International.
Still, Mr. Macron is the clear favorite to become French president, with opinion polls putting him ahead by 20 percentage points or more.
Some investors say Europe’s stabilizing politics could even turn the region’s economic recovery into a boom.
“This allows investors to get back to the basics, to think about economic fundamentals and how it affects monetary policy,” said Paul Meggyesi, a foreign-exchange strategist at J.P. Morgan. “Given how mispriced European assets are, there’s scope for significant moves,” he said.
German and other northern European bonds considered havens sold off sharply Monday. Gold, another haven that has benefited from concern over political risk, fell 1.52% in the wake of the French vote.
French government bonds, meanwhile, rallied alongside those of Italy, Spain and Portugal, the three European markets that typically sell off when investors are concerned about a eurozone breakup.
Investors’ nerves had already been soothed somewhat by a mid-March election in the Netherlands that saw the defeat of anti-euro populist candidate Geert Wilders. And in Germany, support for the euroskeptic Alternative for Germany party ahead of the Sept. 24 election is now below 10%.
“The perception that the center, the establishment, is reasserting itself is good for investors,” said Kevin O’Nolan, portfolio manager at Fidelity International.
Eurozone business surveys published by Markit on Friday indicated activity is at its strongest level in six years. The region’s unemployment rate, at 9.5%, is the lowest since May 2009 and consumer prices rose 1.5% in March from a year earlier, not far from the central bank’s target of close to but below 2%.
Investors had always seen Mr. Macron as one of the more market-friendly candidates in the French election—and as the foremost supporter of deeper eurozone integration. During the campaign, he backed a dedicated budget and parliament for the currency bloc. After the vote, spokesmen for German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker threw their support behind him.
As the country’s economy minister, from 2014 to 2016, Mr. Macron made it easier for employers to lay off workers. His policies include corporate tax cuts and an additional €50 billion ($54 billion) program of public investment.
Market-oriented overhauls of French labor laws, taxation and other areas could boost the country’s long-term growth potential, many economists say. The country’s problem since 2011, however, is that it has been growing well below its potential. France’s sluggish recovery since the height of the eurozone crisis has deepened the longstanding sense of national unease.
Victory for Mr. Macron could, by removing political uncertainty, unleash some of the “animal spirits” that have been lacking from France’s recovery in recent years, says Nicolas Véron, an economist at Brussels think tank Bruegel.
Inflows into Europe’s equity markets have already been picking up, according to data provider EPFR Global. Investors have moved about $5 billion into European equities since the beginning of the year, with a rise in inflows in the past four weeks.
As the eurozone’s economy gathers steam, the ECB may start acting.
ECB policy makers have been wary of signaling an end to their monetary stimulus amid the risk posed by the rise of euroskepticism. Mr. Macron’s first-place finish puts a reduction of stimulus back on the agenda, investors say.
“The focus will now shift to the improving eurozone economy and the prospect of the European Central Bank beginning to withdraw monetary policy stimulus,” said Anthony Doyle, fixed-interest investment director at M&G Investments.
Still, while the central bank has already moved to curb its stimulus in recent months, by slowing its bond purchases and phasing out a series of free loans, ECB chief Mario Draghi warned in Washington Friday that underlying inflation in the eurozone was too weak and the bloc’s economy still needed “very substantial” support from the central bank.
—Tom Fairless contributed to this article.
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Appeared in the Apr. 25, 2017, print edition as ‘French Vote Fuels Hopes for Growth.’