The euro and European government bond yields slipped yesterday after the bloc’s most powerful leader, German Chancellor Angela Merkel, won a fourth term.
Investors were unnerved by the prospect of months of coalition talks that could distract from negotiations with Britain over its divorce from the European Union and efforts to integrate the bloc’s remaining members.
Some analysts said the political uncertainty may also throw into question European Central Bank plans to reduce monetary stimulus, a move likely to be announced on October 26.
Europe’s benchmark German bond yield was set for its biggest daily fall in seven weeks, down five basis points at 0.40 per cent.
The fall was less pronounced in Southern European bond yields as the election result led to concerns about the emergence of a more hardline stance towards the euro zone in the bloc’s largest economy.
The impact on stock markets from the Germany election was less marked, with euro zone shares down around 0.2 per cent.
That followed sharp falls in Asian equities which were hit by concerns over the economic health of the world’s second biggest economy China, while Wall Street was set to open a touch lower.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.8 percent.
Hong Kong’s Hang Seng was down 1.3 per cent and Shanghai slipped 0.4 per cent after a number of Chinese cities rolled out new measures to cool housing prices.
Asian investor sentiment was also undermined by concerns that China’s beefed-up environmental protection could reduce demand.
The New Zealand dollar was also hit by political jitters as the ruling National Party won the largest number votes in a weekend election but failed to secure a ruling majority. The kiwi, the world 11th most-traded currency, was down 0.7 per cent at $0.7288 and set for its biggest daily drop in around a month.
It was at a 1-1/2-month high of $0.7435 as recently as September 20, when speculation for a comfortable win by the ruling party had boosted the currency.
The pound edged up 0.1 per cent to $1.3510, bouncing back from a slide on Friday when ratings agency Moody’s downgraded Britain’s credit rating.
The dollar was up 0.3 per cent against a basket of six major currencies at 92.397.
Oil prices rose to their highest in seven months after major producers said at a meeting in Vienna the global market was well on its way towards rebalancing.
The November Brent crude futures contract was up 35 cents at $57.21 a barrel, its highest since February 23, while US crude for November delivery was down eight cents at $50.58, but not far off recent four-month highs.