It’s been a soft start to the week for European stocks and the single currency after German coalition talks collapsed last night. The declines have been measured in their nature however with drops of less than 1% in the Euro against the US dollar and the Dax showing the immediate reaction hasn’t been too severe.

Germany to call snap elections?

The unsatisfactory culmination of more than 5 weeks of coalition talks in Germany shouldn’t come as too great a surprise considering the large ideological differences between the Green and FDP party who, alongside Chancellor Merkel’s CDU, were seen as the most likely as forming a coalition following September’s elections. The proposed coalition had been dubbed as “Jamaica” given the respective party colours and the failure to reach an agreement has seen the political instability in the Eurozone’s most powerful country increase markedly. Despite taking the largest share of seats by some margin, Chancellor Merkel’s CDU party will be disappointed with the latest developments, and barring an unlikely coalition with the SPD - which the latter has repeatedly stated will not happen - leaves the seemingly unenviable choice between a minority government or fresh elections.

Markets await further news

With the FX markets opening last night it was here that the fallout was seen first with the Euro dropping across the board on the collapsed coalition news. The German Dax opened lower by more than 100 points this morning but has since recovered the entire drop and trades around last week’s closing levels as the morning session draws to a close. German president Steinmeier is expected to make a statement this afternoon and this could well provide further details as to what is most likely to occur going forward. From a markets perspective the calling of snap elections would likely be the most negative with a fresh round of voting raising the possibility of further gains for the anti-immigration FDP. The news will come as a blow for Whitehall with the UK looking to make some progress before year-end in Brexit negotiations and internal disputes in Germany are threatening to distract the focus of the EU’s most powerful nation.  

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