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Monday 10:05 GMT

What you need to know

  • Euro fights back over the flatline after Angela Merkel fails to form German coalition
  • Xetra Dax 30 moves higher on the day as investors buy into the financial sector
  • Pound up on hopes that Brexit talks can move from divorce payment on to trade
  • Oil mixed but Brent holds $62

Leading quote

“The collapse of the coalition talks in Germany on Sunday night brought back the topic of political uncertainty to financial markets,” says Tilmann Galler, global market strategist, JPMorgan Asset Management.

“Angela Merkel’s position seems to be significantly weakened. This could leave Europe’s largest economy politically paralysed for the time being, reducing the chances for any breakthrough in the EU reform agenda or the Brexit negotiations.”

Hot topic

Politics is making its presence felt on currencies markets — and has sent a ripple through German stocks — although the euro and the Xetra Dax are both higher.

The shared currency has recovered from fairly sharp intraday losses to climb back to the flatline at $1.1796 as investors measure the implications of Angela Merkel’s bid to form a new German government, which collapsed on Sunday night.

The euro was down by as much as 0.6 per cent to $1.1712, which was its largest fall in over a month, although it came in Asian trade when volumes are lower.

The Xetra Dax 30 has followed a similar path to trade up 0.2 per cent overall. It is now only marginally underperforming the pan-European Stoxx 600, which is up 0.3 per cent.

Financial stocks have moved from the forefront of the selling to the vanguard of the rebound. Deutsche Bank is up by over 1 per cent, having been down by the same margin. Commerzbank is also up 1.1 per cent.

Bund yields have been steadier throughout, with investors buying into the debt, lifting the yield on benchmark 10-year Bunds by 1.2 basis points to 0.353 per cent. The yield on more policy sensitive 2-year Bunds is flat at -0.712 per cent.

The dollar is no stranger to the effects of political uncertainty. Investors are continuing to wait for signs of progress on US tax reform, alongside concern that the market has already priced in the delivery of such measures into the dollar and US stocks. The index measuring the US currency against a basket of peers is down 0.1 per cent at 93.593.

Sterling is not yet concerned about the potential impact of German politics on Brexit talks. Rather, it is tracking hopes that negotiations will be clear to move on from the financial terms of the UK’s divorce payment to the EU, helping the pound up 0.5 per cent to $1.3271, a 12-session high.

Equities

London’s FTSE 100 is down 0.3 per cent, hit by the pound’s climb. The CAC 40 in Paris is down 0.1 per cent.

Equities were lower in Asia, with Hong Kong’s Hang Seng benchmark off 0.2 per cent. Chinese stocks were suffering after the People’s Bank of China on Friday announced a new set of rules aimed at curbing financial risk in the asset management industry.

Hong Kong’s Hang Seng is up 0.2 per cent, while the Shanghai Composite is also 0.2 per cent higher. Tokyo’s Topix index was down 0.2 per cent as the financials segment fell 0.8 per cent. In Australia, the S&P/ASX 200 index was off 0.1 per cent.

Fixed income and currencies

Trading in sovereign bonds remains relatively muted despite geopolitical rumblings in Europe. The yield, which moves inversely to price, on 10-year US Treasuries is down 2 basis points at 2.326 per cent, as investors stop short of moving into the debt, a classic haven asset.

Neither are haven currencies rallying. The yen is flat at Y112.08 and the Swiss franc is 0.1 per cent weaker at SFr0.9892 per dollar.

Commodities

Oil prices are mixed, with global marker Brent crude holding the $62-per-barrel mark, down 0.3 per cent at $62.52 a barrel. West Texas Intermediate, the US benchmark, is up 0.1 per cent at $56.60.

Gold is down 0.3 per cent at $1,291.14 per ounce.

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