European stocks fell rapidly and safe heaven bonds of the government were in great demand in the early morning of Monday as the collapse of the talks of coalition in Germany served as a reminder of the political risk that still runs as an undercurrent in Europe. Angela Merkel who is the German Chancellor of the Christian Democratic Union (CDU) spoke to the media after the exploratory talks about forming a new coalition government collapsed in Berlin, Germany on the 20th of November 2017. On Monday, Chancellor Angela Merkel said that her efforts for the formation of a three way coalition government had failed which pressured Germany into a political crisis and pushing the largest economy of Europe closer to a possible new election. German stocks led the move downward with GDAXI which is the main index of the country down by more than 0.2 percent that pulled the main pan European broader Euro STOXX 600 index lower by a similar amount. At this point of time investors preferred safe haven government bonds which is the yield on Germany's 10-year government bond, the benchmark for the bloc, went lower to a 1-1/2 week low of 0.35 percent at one stage.
Rainer Guntermann who is a rate strategist at Commerzbank said that the collapse of the talks was a surprise and there is very little clarity here about how things will unfold from here. It actually adds to the uncertainty which is weighing on risk sentiment in world markets. However, the other analysts said that the overall sentiment towards the euro zone remains positive and that clearly reflected in the resilience of the euro on Monday. Viraj Patel who is a currency strategist at ING in London said that the political story of the euro zone is an outlier at this point of time in the G10 currency trading space. He also stated that the German political news over the weekend is not a game changer in their view but the broader story still remains of a recovering Eurozone with the improvement of the fundamentals. This is the reason why the euro, which had dipped to as low as $1.1722 EUR, at one stage was back up the same day by 0900 hours GMT, resuming a more than 2 percent recovery against the dollar over the past two weeks. A comparison against the yen, the single currency dipped as much as 0.8 percent in Asian trading to a two-month low of 131.16 Yen EURJPY=EBS. But it was flat in London trade at 131.97 yen, down just 0.2 percent on the day.