Euro retreats as investors fret over German election

Several 500 Euro notes displayed in an arrangement. (MIGUEL MEDINA/AFP)

The lower euro helped European stocks hold their ground and brush off a drop in Tokyo as US-North Korea tensions flared once more.

Frankfurt's DAX 30 index and the Paris CAC 40 ended the day with marginal gains of under 0.1 per cent. London slid 0.2 per cent.

Wall Street stocks were flat heading towards midday.

"Political uncertainty after the German election has sent the euro tumbling to a one-month low against the dollar," said market analyst Jasper Lawler at London Capital Group.

On Sunday, Merkel won a fourth term as chancellor, but a hard-right opposition party gained parliamentary seats for the first time.

"The impact of rising nationalism and a possible coalition between Merkel's CDU/CSU with the Liberal Party is already seemingly affecting German policy," said Lawler, pointing to a series of official statements opposing elements of French President Emmanuel Macron's speech pushing for greater European integration.

"We view the long-term viability of the euro as hinged on EU fiscal integration," he added.

However, Craig Erlam, senior market analyst at currency trading platform Oanda, sees the selloff as booking profits from the recent run-up in the value of the euro.

"Rather than being a source of negativity for the euro, I think traders are seeing the election as an opportunity to lock in some profits which is triggering a small but arguably necessary correction," he said in a note to clients.

Also in focus on Tuesday for Germany and France was the maker of TGV trains, Alstom, set to announce a merger with industrial leader Siemens in a giant and politically tricky deal that would create a new European champion.

The board of partly state-controlled Alstom, the manufacturer of French high-speed trains which are a source of national pride, was set to meet on Tuesday to discuss the tie-up with its German competitor.

Alstom shares rose 0.6 per cent to close at €33.64 in Paris, while Siemens shares dipped 0.1 per cent to €116.55 in Frankfurt.

ASIA BEATS RETREAT

Asian stock markets mostly retreated while haven assets such as gold and the yen won support after Pyongyang accused US President Donald Trump of declaring war on the country and warned it could shoot down US bombers. The yen later gave up those gains, as did gold.

The dollar held its ground following conflicting comments from top Federal Reserve officials over the timing of the bank's next rise for US interest rates.

Oil prices meanwhile retreated following Monday's surge. The rally had come after Turkish President Recep Tayyip Erdogan threatened to block key crude exports from Iraq's Kurdish region, which is holding an independence referendum.

Brent jumped nearly four per cent to its highest level since July 2015, while US benchmark West Texas Intermediate piled on three per cent on Monday.

"Brent crude oil and WTI have been hit by profit taking," said market analyst David Madden at CMC Markets in London. "The energy market has been strong lately, and dealers took the opportunity to lock in some profits."

Key figures around 1530 GMT:

London - FTSE 100: DOWN 0.2 per cent at 7,285.74 points (close)
Frankfurt - DAX 30: UP 0.08 per cent at 12,605.20 (close)
Paris - CAC 40: UP 0.03 per cent 5,268.76 (close)
EURO STOXX 50: DOWN 0.2 per cent at 3,532.16
New York - DOW: FLAT at 22,295.67

Tokyo - Nikkei 225: DOWN 0.3 per cent at 20,330.19 (close)
Seoul - Kospi: DOWN 0.3 per cent at 2,374.32 (close)
Hong Kong - Hang Seng: UP 0.1 per cent at 27,513.01 (close)
Shanghai - Composite: UP 0.1 per cent at 3,343.58 (close)

Euro/dollar: DOWN at US$1.1773 from US$1.1846 at 2100 GMT
Dollar/yen: UP at 112.14 yen from 111.68 yen
Pound/dollar: DOWN at US$1.3423 from US$1.3465

Oil - Brent North Sea: DOWN 55 cents at US$57.88 per barrel
Oil - West Texas Intermediate: DOWN 27 cents at US$51.95