Markets react to German election shock

As predicted, Angela Merkel has won a fourth term in office, but not without handing over a chunk of her vote to the far-right AfD. The SDP did even worse, and the chancellor will be forced into bed with the Greens and the Free Democrats (FDP) in a Jamaica coalition.

But her victory was much less convincing than markets had pencilled in, so speculation around her coalition and its implications could trigger some volatility in the days ahead. Any extended period of uncertainty poses a problem, certainly if the pro-business FDP's dislike of Macron threatens Germany's relationship with France. Markets won't like that.

It's possible that Merkel becomes distracted from international politics during the inevitable horse-trading following a disappointing election for her. Any sense that this weakens the EU's position could play into the hands of UK Brexit negotiators, as a fourth round of talks with European officials begins in Brussels today.

Watch the pound for indications as to how traders think things are going. Remember, sterling and the FTSE 100's overseas earners have an inverse relationship, so blue-chips will struggle if the pound strengthens.

Equally important over the next few days will be speeches by central bank leaders, for it is Mario Draghi, Janet Yellen and Mark Carney that will dictate market direction in the weeks and months ahead.

Draghi's unlikely to give away too much, preferring to keep his powder dry until the next ECB meeting. That's when we'll likely get confirmation that tapering of monetary stimulus will begin next year. Yellen's said enough lately, but markets will want further clarity on inflation.

Carney's speech later this week celebrating 20 years of Bank of England independence is also an opportunity to offer clues as to UK rate policy. Anything hawkish from the Bank's governor, certainly anything that increases the likelihood of a rate rise in November, would trigger a surge in the pound and possibly spell bad news for the FTSE 100.

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