By Marc Jones
LONDON (Reuters) - Shares and core euro zone bonds carved out minor gains on Monday as fresh concerns about the Federal Reserve's policy stance took the shine off an election triumph for Angela Merkel and some upbeat euro zone data.
Merkel's resounding win in Sunday's German elections, seen as a strong vote of support for her efforts in keeping the euro together, was followed by forward-looking euro zone PMI data showing the bloc's economy continuing to pick up pace.
Markit's September Flash Composite Purchasing Managers' Index (PMI) jumped to 52.1 from last month's 51.5, its highest since June 2011 and beating expectations for 51.9. New orders were at their fastest pace in over two years.
Stock markets finally found direction after a choppy start with gains of 0.2 and 0.3 percent on Germany's DAX (.GDAXI) and France's CAC 40 (.FCHI) helping lift the FTSEurofirst 300 (.FTEU3) 0.2 percent.
European stocks hit a five-year high last week and Nick Beecroft, chairman and senior market analyst for Saxo Bank capital markets, said Merkel's election win was "a ringing endorsement" to ensure the euro survives.
"The positive thing for the euro is that it is 99 percent certain we will have grand coalition that will be able to change the (German) constitution if needed to allow euro bonds. This won't happen overnight but I expect it to gradually come on to the agenda."
Merkel's victory gave the euro only the briefest of lifts, however, as she will still need a new coalition partner to rule.
Having initially gained a quarter of a U.S. cent to $1.3555, it quickly faded to $1.3516. Against the yen, the common currency eased to 133.67, from an early 134.56 while against sterling it inched down to 1.1867 per pound.
That left the dollar index (.DXY) little changed at 80.382, not far from a seven-month trough of 80.060 plumbed last week.
German Bund futures were last 18 ticks up at 138.32 with cash 10-year bond yields 2.1 bps lower at 1.88 percent.
Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> had dipped 0.1 percent. U.S. futures pointed to a slightly firmer open on Wall Street.
Some Asian markets had started the week with significant gains, thanks to a survey that showed a promising pick up in Chinese export orders, another sign of stabilisation in the world's second biggest economy.
The preliminary HSBC Purchasing Managers' Index (PMI) for China climbed to 51.2 in September, from August's 50.1, with 10 out of 11 sub-indices up in the month. Dealers had looked for a reading of around 50.9.
New export orders jumped to a 10-month peak of 50.8, the first time in six months that exports have grown. Readings on manufacturing across Europe are due later on Monday.
Shares in Shanghai (.SSEC) gained 1.0 percent and Taiwan's main index (.TWII) was up 0.9 percent. Australian shares were down 0.5 percent and Japanese markets were closed for a holiday.
The upbeat China survey sent the Australian dollar a quarter of a U.S. cent higher to $0.9422. China alone takes around one-third of all Australia's exports, chiefly commodities such as iron ore.
While Merkel won by a landslide, her conservatives appeared just short of the votes needed to rule on their own.
That left open the possibility of a "grand coalition" with the center-left Social Democrats (SPD), who came a distant second. In the past, establishing a coalition accord has taken between four and eight weeks.
"The formation of a grand coalition could be a positive outcome for the euro zone," said Peter Dragicevich, a currency strategist at Commonwealth Bank of Australia.
"The SPD is in favour of further euro zone integration. As such, a grand coalition may be more willing to work with the ECB and euro zone governments to find a sustainable solution to the issues plaguing the euro zone periphery."
He noted one of the SPD's 2013 election policy proposals was the creation of a European debt redemption fund funded by euro zone bonds.
SECOND-GUESSING THE FED
The Dow Jones industrial average (.DJI) lost 1.2 percent on Friday, while the S&P 500 Index (.SPX) eased 0.7 percent.
Some of Friday's dip was attributed to comments from St. Louis Federal Reserve Bank President James Bullard who said that a start to winding down the stimulus program was possible in October, depending on coming economic data.
That was a surprise to most analysts who had thought there would not be enough fresh economic news by the October 29-30 meeting to swing the Fed from its accommodative course.
Some clarity might come later on Monday since no less than three Fed officials are speaking, headlined by New York Fed President William Dudley. He is thought to be close to Chairman Ben Bernanke and to speak for the dovish majority of voting members.
Even the thought the Fed might start tapering in October jolted commodity markets, leaving gold down at $1,321.81 an ounce, from Thursday's peak of $1,374.54. Copper futures were off 1.2 percent.
Brent crude oil was steady at $109.20 a barrel, while U.S. crude was also flat at $104.79.
(Editing by Catherine Evans)