World markets spluttered, irked by the failure of German coalition talks which sent the euro and the price of oil lower.
The withdrawal of the small centre-right FDP from the German talks amid disagreements with Chancellor Angela Merkel’s CDU and the Green Party over issues ranging from asylum to tax and environment raises the chances of Germany having to return to the polls.
A month of exploratory coalition talks in Germany ended in a dramatic collapse on a dispute over migration policy.
The upshot is that the region’s dominant country remains hamstrung on the global stage, potentially affecting everything from policy toward the European Union, Turkey and Russia to government spending.
Ms Chancellor Angela Merkel said that she’s sceptical about forming a minority government and would prefer new elections if she can’t put together a majority in the legislature.
The risk for markets is that the outside chance of a new election embeds fresh uncertainties about who runs Europe’s biggest economy, gives the anti-euro far-right AfD another chance of registering their popularity and representation, weakens any new push on further eurozone integration and reduces the chances of easier German fiscal policy at the margins.
For business and the economy, however, euro weakness may be an offsetting silver lining that underpins one of the fastest German expansions in years.
German bund yields were lower on a slight tilt to safety, with peripheral euro sovereign debt spreads widening a touch.
Nevertheless, the Stoxx Europe 600 Index advanced and Germany’s Dax rebounded from a seven-week low, with investors judging that the
failure of the talks won’t threaten the economy. The euro declined against the dollar, and traded down 0.6% to 88.67 pence against sterling.
Sterling traders will focus on a potential downgrade to the UK growth outlook this week and the British government’s efforts toward agreeing on a Brexit divorce bill.
Sterling was nonetheless boosted yesterday by reports that the UK was preparing to make an enhanced divorce bill offer to the EU ahead of crucial talks starting next month.
The price of Brent crude for January settlement lost $1.01 to $61.65 a barrel in London trade, after dropping 1.3% last week, as markets digested political uncertainty from Germany to the Middle East and anticipation about Opec’s next move kept traders on the defensive.
The global benchmark crude traded at a premium of $5.78 to West Texas Intermediate, which held near $56 a barrel
The Organisation of Petroleum Exporting Countries will be briefed this week by oil-service provider Schlumberger as well as Citigroup as the cartel debates whether to extend output cuts at a summit in Vienna on November 30.
The political turmoil in Germany helped strengthen the dollar, which depresses oil prices, said Bill O’Grady, chief market strategist at Confluence Investment Management in St Louis.
“Politically, around the world, there are just a lot of plates spinning,” Mr O’Grady said. “There’s potentially a lot of supply out there and the only thing keeping it off the market right now is Opec discipline,” he said.
Traders may also be closing out some bullish bets on crude ahead of Thanksgiving in the US, he said.
Reuters and Bloomberg