Markets flat as Merkel mulls coalition options

Pan Pylas, AP Business Writer

LONDON (AP) -- Markets started the week leaden-footed Monday despite solid economic indicators out of China and Europe and an unexpectedly strong showing by Chancellor Angela Merkel in Germany's national elections.

Though posting its best performance in 23 years in Sunday's election, Merkel's center-right bloc fell just short of an overall majority and will have to find a new coalition partner after its previous one failed to pass the 5 percent threshold needed to get parliamentary representation.

Merkel looks likely to end up leading either a "grand coalition" government with the center-left Social Democrats of defeated challenger Peer Steinbrueck — reviving the alliance that ran Germany in her first term between 2005 and 2009 — or, less likely, with the Greens. Whatever emerges, few analysts think there will be a fundamental change in policy within Germany and the wider 17-country eurozone. However, the process of forming a coalition could take time and uncertainty can erode confidence in financial markets.

"The negotiations between the two main parties may not be as smooth as people had hoped, which could force some market jitters," said Max Cohen, a trader at Spreadex.

By midafternoon in Europe, Germany's main stock index, the DAX, was 0.5 percent lower at 8,634. The FTSE 100 index of leading British shares was down 0.6 percent at 6,554 and the CAC-40 in France was 0.7 percent lower at 4,175.

The euro was also little changed, trading 0.4 percent lower at $1.3484.

Markets in Europe were unaffected by a survey suggesting that the economic recovery across the 17 European Union countries that use the euro is picking up and that unemployment may be peaking. The composite purchasing managers' index — a gauge of business activity across the manufacturing and services sectors published by financial information company Markit — rose for the sixth month to a 27-month high of 52.1 points in September from 51.5 in August. That's further above the 50 threshold that indicates expansion and is the latest indicator to suggest the eurozone recovery is gathering pace.

Amid a dearth of economic and corporate news out of the U.S., trading on Wall Street was also muted, with the Dow Jones industrial average down 0.1 percent at 15,431 and the broader S&P 500 index 0.4 percent lower at 1,703.

Over the week, traders will have a run of speeches from policymakers at the Federal Reserve to digest — nine officials are due to speak. Last week, the Fed surprised markets by opting to not reduce its monetary stimulus. Investors will also be keeping an eye on discussions in Congress over raising the debt ceiling. Lawmakers need to agree to raise the debt ceiling by Oct. 1 to avoid a government shutdown, and a potential default on payments, including debt, later in the month.

"Investors will remember a similar fiscal 'stalemate' back in 2011 over the debt-ceiling, which resulted in dollar weakness, higher bond yields and a sovereign credit rating downgrade of the U.S.," said Neil MacKinnon, global macro strategist at VTB Capital.

Earlier in Asia, a positive Chinese manufacturing survey had little impact outside of Shanghai. HSBC said its monthly purchasing managers' index for China rose to 51.2 points from 50.1 in August. The data breathed some life into Chinese markets, with the Shanghai Composite Index rising 1.3 percent to 2,221.04 and the smaller Shenzhen Composite Index spiking 2.2 percent to 1,059.74.

Elsewhere in Asia, trading was subdued. Japan's stock market was closed for a public holiday while a powerful storm forced Hong Kong markets to close in the morning. In the afternoon, Hong Kong's Hang Seng fell 0.6 percent to 23,371.54. South Korea's Kospi rose 0.2 percent to 2,009.41 while Australia's S&P/ASX 200 fell 0.5 percent to 5,252.50.

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Pamela Sampson in Bangkok contributed to this report.