German political uncertainty rattles markets; Mediclinic ditches bid plan
British blue-chip stocks closed slightly higher Monday, aided by gains for home builders, but a rise in the pound put some pressure on exporters.
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A collapse in talks between German political parties aimed at forming a governing coalition sent ripples through markets, as it put German Chancellor Angela Merkel's leadership in doubt and raised the prospect of a snap election.
Meanwhile, utility stocks were pressured as the parent company of British Gas said it would make changes to the tariffs it offers to customers.
What markets are doing: The FTSE 100 index rose 0.1% to end at 7,389.46, a turnaround from a 0.4% loss early in the session. The London benchmark on Friday slipped 0.1% (http://www.marketwatch.com/story/ftse-100-dips-as-pound-rises-on-news-mueller-subpoenaed-trump-campaign-2017-11-17) and logged a weekly decline of 0.7%.
The pound traded at $1.3241, up from $1.3216 late Friday in New York, but off of an intraday high of $1.3280. Against the euro, sterling bought EUR1.1285, up from EUR1.1207 late Friday.
A stronger pound can hurt shares of multinational companies listed on the FTSE 100 as sterling strength could reduce earnings made by those companies when they are translated back into sterling terms. Among multinationals, packaging products maker Smurfit Kappa Group PLC fell 0.4% and tobacco company Imperial Brands PLC (IMBBY) slipped 0.7%.
What's moving markets: London-listed shares, alongside the euro and European equities , turned higher following developments in Germany, where over the weekend there was a breakdown in negotiations to form a "Jamaica" governing coalition of parties.
Stocks and the euro pared losses following a Monday report that the pro-business Free Democratic Party said it would support a minority government. Markets then started to move higher following reports that German President Frank-Walter Steinmeier would make a statement at 2:30 p.m. local time, or 8:30 a.m. Eastern Time.
On Sunday, the Free Democratic Party ended talks about forming a coalition government (http://www.marketwatch.com/story/euro-plummets-as-uncertainty-in-germany-rattles-markets-2017-11-19) with Merkel's Christian Democratic Union and the center-left Greens. That puts Merkel's fourth term as chancellor in doubt, as well as raising the prospect of a minority government and perhaps eventually a new general election if the situation can't be resolved.
The pound's gain came after Chancellor Philip Hammond signaled the U.K. is prepared to increase the payment by the U.K. to leave the European Union -- the so-called divorce bill. Media reports said the payment could be raised by EUR20 billion to more than EUR40 billion, closing in on the EUR60 billion the EU has asked for.
May, whose leadership has been weakened by ministerial losses, meets with her cabinet on Monday to hash out the issue of the divorce bill.
What strategists are saying: "There is now a very real possibility that Angela Merkel may lose her position as German Chancellor with the prospect of new German elections increasingly likely. This may be some way off happening for now, but the markets are reacting," said Richard Perry, market analyst at Hantec Markets, in a note released before reports that Steinmeier planned to make a statement.
"The pound is better bid as Chancellor Philip Hammond could agree to pay a higher EU divorce bill, which could help moving on with the Brexit negotiations," said LCG senior market analyst Ipek Ozkardeskaya.
"If the U.K. decides to increase its bid for a Brexit deal, the chances of fiscal gifts will likely be limited. Chancellor Hammond will likely display a cautious budget plan and the Bank of England will likely stay accommodative," Ozkardeskaya said.
The budget will be presented on Wednesday.
The budget presentation will come in the backdrop of a recent run of economic data indicating a squeeze on consumers as prices rise and inflation-adjusted wages fall. On Monday, Visa and IHS Markit said (https://resources.mynewsdesk.com/image/upload/gelntwakbegnzjdzk6gl.pdf) spending by British households during this Christmas shopping season is likely to fall 0.1% on a year-over-year basis in November and December.
Stock movers: Home builders gained Monday, with Barratt Developments PLC (BDEV.LN) up 1%, Taylor Wimpey PLC (TW.LN) moved up 0.4% and Persimmon (PSN.LN) picked up 0.3%.
"The FTSE 100 is being boosted by the house builders ... with Wednesday's budget expected to be dominated by the government's attempts to fix a housing market that has too few new houses being built," said Joshua Mahony, market analyst at IG, in a note. "With [opposition party] Labour holding the vote for younger parts of the country, Wednesday's budget is likely to focus on getting more first-time buyers onto the property ladder."
Centrica PLC (CNA.LN) swung down 1.1% after the British Gas parent said it's planning withdraw its standard variable tariff (http://www.marketwatch.com/story/centrica-to-pull-back-on-standard-variable-tariff-2017-11-20) for new customers and encourage existing customers to move to other products.
National Grid PLC (NG.LN) slipped 0.3%. SSE PLC (SSE.LN) was down 1.1% after energy regulator Ofgem said it would investigate the company's "cheapest tariff" messaging (http://www.marketwatch.com/story/ofgem-to-probe-sses-cheapest-tariff-messaging-2017-11-20-2485441) in its annual statements.
Mediclinic International PLC (MDC.LN) fell 3.1% after the private hospital company said it's ditching plans to make an offer (http://www.marketwatch.com/story/mediclinic-no-longer-plans-to-make-offer-for-spire-2017-11-20) to buy Spire Healthcare Group PLC (SPI.LN) . Spire shares fell 8.4% on the midcap FTSE 250 index.
(END) Dow Jones Newswires
November 20, 2017 11:55 ET (16:55 GMT)