European stocks have slipped and safe haven government bonds are in demand today, as the collapse of coalition talks in Germany serves as a reminder of political risk that still runs as an undercurrent in Europe.
Chancellor Angela Merkel today said her efforts to form a three-way coalition government had failed, thrusting Germany into a political crisis and pushing Europe's largest economy closer to a possible new election.
German stocks led the move downward, with the country's main DAX index down by over 0.2%, pulling the main pan-European broader Euro STOXX 600 index lower by a similar amount.
The FTSE in London and the Paris CAC are also lower, while in Dublin the ISEQ had risen 0.19% shortly after 10am.
Investors instead are preferring safe haven government bonds: the yield on Germany's ten-year government bond, the benchmark for the bloc, edged lower to a 1-1/2 week low of 0.35% at one stage.
The collapse of the talks was a surprise and there is little clarity on how things will unfold from here. It adds to uncertainty which is weighing on risk sentiment in world markets," said Rainer Guntermann, rates strategist at Commerzbank.
Other analysts said however, that the overall sentiment towards the euro zone remains positive, reflected in the resilience of the euro on Monday.
"The eurozone political story is an outlier at the moment in the G10 currency trading space. The German political news over the weekend is not a game changer in our view," said Viraj Patel, a currency strategist at ING in London. "The broader story still remains of a recovering eurozone with improving fundamentals."
The euro, which had dipped to as low as $1.1722 at one stage, was back up to $1.1791 by 10am Irish time, resuming a more than 2% recovery against the dollar over the past two weeks.
The euro is also lower against sterling, down 0.4% for the day at £0.8884.
Against the yen, the single currency dipped as much as 0.8% in Asian trading to a two-month low of 131.16 yen. But it was flat in London trade at 131.97 yen, down just 0.2% on the day.