Following the win of European Union’s most powerful leader German Chancellor Angela Merkel’s fourth term but faced by a fractured parliament as support for the far-right surged, the single currency and European stocks slipped.
Distraction from negotiations with Britain over its divorce from the European Union and efforts to integrate the bloc’s remaining members could be caused by the prospect of months of coalition talks which had unnerved investors.
“Merkel’s most pressing task now is not to knit Europe closer together. It’s to form a coalition which will prove to be extremely difficult and time-consuming,” said Oliver Rakau, chief German economist at Oxford Economics.
A European Central Bank policy meeting left currency bulls optimistic the ECB would begin tapering its big stimulus program on September 8 and the euro slid 0.3 percent to $1.1918, putting more distance between a 2-1/2-year high of $1.2092 reached on that date.
In Asia, equity markets were hit by concerns over the economic health of the world’s second biggest economy China and Euro zone stock markets were down 0.3 percent wihich was less compared to the falls in Asia.
SCI’s broadest index of Asia-Pacific shares outside Japan was last down 0.8 percent.
After a number of Chinese cities rolled out new measures to cool housing prices, Shanghai slipped 0.4 percent and Hong Kong’s Hang Seng was down 1.3 percent.
Concerns that China’s beefed-up environmental protection could reduce demand, and consequently economic growth also undermined investor sentiment.
By becoming the first far-right party to enter parliament in more than half a century, the anti-immigration Alternative for Germany (AfD) stunned the establishment in the German election and the focus was firmly on this event in the European debt markets.
A three-way tie-up with the liberal Free Democrats (FDP) and the Greens – an arrangement untested at national level is Merkel’s only straightforward path to a majority in parliament as all parties have ruled out a coalition with the AfD.
Investors sold lower-rated debt in the likes of Portugal, Spain and Italy and bought German government bonds on the result – seen as one of the safest stores of cash in the euro zone.
Investors may have used the result as an excuse to sell the euro which was moving lower before the vote, some analysts said and on the overall the market moves were fairly modest.
“The euro…was already losing support from the European Central Bank’s monetary policy theme and appeared to be on its way lower,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.
Down 0.7 percent at $0.7288 and set for its biggest daily drop in around a month was the kiwi, the world 11th most-traded currency in New Zealand.
“While there are a few different scenarios and some potentially testy issues to negotiate, ultimately the political landscape appears as though it will remain relatively centralist and we are reasonably agnostic on what it all means,” wrote economists at ANZ.
On Friday, OPEC and other oil producers said that it may wait until January before deciding whether to extend their output curbs beyond the first quarter of 2018 and that they were clearing a glut that has weighed on crude prices, following which there was a consolidation in oil prices.
(Adapted from Reuters)