Politics, PMI amplify euro-zone debt fears

FRANKFURT (MarketWatch) � If investors didn�t have enough to worry about as they watch France�s presidential election and the budget-related collapse of the Dutch government, a closely watched gauge showed Monday that business activity across the 17-nation euro area shrank at a faster pace in April.

The euro-zone preliminary composite purchasing managers� index, or PMI, compiled by data provider Markit, fell to a five-month low of 47.4 in April from 49.1 in March, defying forecasts for a rise to 49.3. The manufacturing PMI gauge dropped to a 34-month low, while the services gauge posted its lowest reading in five months. See more on euro-zone PMI.

A reading of less than 50 signals contraction. PMI data are seen as timely and relatively reliable indicators of economic growth.

Click to Play Sarkozy, Hollande fight for top job

President Nicolas Sarkozy is in a fight for political survival after he lost to François Hollande in the first round of the presidential election. Grainne McCarthy discusses their likely strategies to lure swing voters. (Photo: Getty Images)

The figures put added pressure on European stocks, which finished broadly lower. Wall Street also came under pressure. Read more about Europe Markets.

The euro EURUSD fell to $1.3134 versus the dollar, down from $1.3219 in North American activity late Friday.�

German government bonds, known as bunds, rallied on safe-haven demand, pushing yields lower. The premium demanded by investors to hold peripheral and other so-called core government bonds (including French and Dutch debt) over Germany rose.

�The flash PMI signaled a faster rate of economic contraction in the euro zone during April, extending what appears to be a double-dip recession into a third consecutive quarter, said Chris Williamson, chief economist at Markit.

The preliminary data showed that German business activity slowed to near-stagnation, while French activity posted a steep downturn potentially tied to uncertainty surrounding the country�s presidential election, Williamson added.

Hollande and Holland

France�s yield FR:10YR_FRA premium over Germany DE:10YR_GER at the 10-year level jumped 0.09 percentage points to a three-month high of 1.53 percentage points, according to data provider Tradeweb.

The spread between AAA-rated Dutch NL:10YR_NET and German 10-year bond yields widened dramatically by 0.17 percentage point to 0.86 percentage points, its widest since 2008.

Reuters Fran�ois Hollande, the Socialist candidate for France�s presidency, arrives at his campaign headquarters in Paris early Monday.

French President Nicolas Sarkozy on Sunday became the first incumbent to fail to top a first-round presidential contest, coming in second behind Socialist challenger Fran�ois Hollande out of a field of 10 candidates. Sarkozy and Hollande face each other in a May 6 runoff, with polls showing Hollande with a lead.

Sarkozy is fighting to survive amid backlash against fiscal austerity, according to Jane Foley, senior currency strategist at Rabobank International in London. He has promised to force a renegotiation of the fiscal pact agreed by euro-zone leaders at the behest of German Chancellor Angela Merkel and Sarkozy to include growth-oriented measures.

�While the lack of growth in the euro-zone region clearly does need to be addressed, [investors fear] fiscal reform could be watered down, which could open the path for a longer and potentially deeper bout of contagion in the debt markets,� Foley wrote in emailed comments.