Europe Markets

Stocks close lower as debt ceiling, German elections weigh

European markets close lower

European shares closed lower after a choppy day of trade on Monday, as uncertainty over the formation of a coalition government in Germany weighed on markets. Wall Street added to the tepid mood, with stocks across the Atlantic pressured by the debt ceiling and budget wrangling in Washington.

The pan-European FTSEurofirst 300 Index provisionally closed 0.5 percent lower at 1,255.9. London's FTSE 100 closed down around 0.7 percent and the German Dax and the French Cac both closed down 0.6 percent.

Meanwhile, German Chancellor Angela Merkel performed better-than-expected in Sunday's national elections, meaning she is almost certainly guaranteed a third term. However, she is likely to opt to form a new "grand" coalition with the center-left Social Democratic Party.

"Angela Merkel won a resounding endorsement of her policies from the German voters, with the highest share of votes for the CDU since 1990, but she didn't win enough to avoid a painful period of coalition-building and uncertainty," said Societe Generale's Kit Juckes in a research note.

"The outcome leaves markets somewhat in limbo, despite positive headlines helping the euro (hurting the dollar), and supporting both risk assets and peripheral European bonds," he added.

Earlier in the trading session, markets got a small boost when better-than-expected business activity figures were released for the euro zone. French stocks in particular were boosted after composite PMI data for September came in above 50 for the first time in 19 months. A reading above 50 indicates economic expansion.

(Read More: Euro zone private sectors power ahead)

U.S. budget talks will continue this week, with the aim of passing a resolution to fund government beyond October 1. On Friday, Republicans passed a bill that would fund the government until December 15, but would defund Obamacare.

Daiwa Capital Market's Michael Moran warned that acrimonious debate could shake consumers and businesses' resurgent confidence and lead to a reduction in spending plans.

"This seemed to occur in 2011, when GDP in Q3 advanced only 1.4 percent in the wake of the heated debate over the debt ceiling… Discord could easily arise in the upcoming debate, as some legislators are attempting to use the new legislation to defund the Affordable Care Act, obviously a sensitive issue and a risky strategy," he said in a report.

New York Fed Reserve President William Dudley said on Monday that the central bank still needed to push hard against threats to the economic recovery. Dudley defended the Fed's decision last week not to trim its aggressive bond-buying, arguing that any changes to the quantitative easing program mush be based on the most recent measures of economic health.

In China, investors digested better-than-expected factory activity data. However, trading volumes were thin in Asia, with Japanese markets shut for a public holiday.

HSBC's flash manufacturing PMI of small- and medium-sized firms in China hit a six-month high of 51.2 in September, higher than August's reading of 50.1, thanks to stronger domestic and foreign demand.

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