European markets power on after early German wobble

By Abhinav Ramnarayan

LONDON (Reuters) - The euro and European stocks dipped in early trades on Monday after coalition talks collapsed in Germany, but they recovered as investors turned their focus back to improving fundamentals.

Chancellor Angela Merkel said her efforts to form a three-way coalition government had failed, thrusting Germany into a political crisis and pushing Europe's largest economy closer to a possible new election.

German stocks, which had opened the day half a percent lower, had erased all the losses and were up 0.1 percent by 1240 GMT, while the main pan-European broader Euro STOXX 600 index was 0.3 percent higher.

This move was even more stark on the euro: the single currency had dipped to as low as $1.1722 at one stage, was back up on the day by 0900 GMT, resuming a more than 2 percent recovery against the dollar over the past two weeks.

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. But it was flat in London trade at 131.97 yen.

"The eurozone political story is an outlier at the moment in the G10 currency trading space. The German political news over the weekend is not a game changer in our view," said Viraj Patel, a currency strategist at ING in London. "The broader story still remains of a recovering euro zone with improving fundamentals."

In fact, Germany's own economy is powering into the end of the year thanks to strong industrial activity and firms are increasingly struggling to find workers to satisfy orders, its central bank said on Monday.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan was off its session lows to be slightly down, as volatile Chinese shares reversed earlier sharp losses.

Japan's Nikkei stock average finished down 0.6 percent.

"It's year-end season, so people have more incentive to take profits," said Kyoya Okazawa, Hong Kong-based head of institutional clients, APAC at BNP Paribas Securities.

Wall Street futures suggested that U.S. stocks were set to edge lower as well after ending last week on a sour note as investors weighed the fate of the Republicans' tax overhaul plan.

The dollar, on the other hand, was higher against a basket of major currencies on Monday, and moved further away from one-month lows hit last week.

Crude oil futures were broadly lower, with Brent crude dropping 1.2 percent, with traders wary of betting too heavily on which way prices might move ahead of an OPEC meeting next week, when the exporter group is expected to decide whether to continue output cuts aimed at propping up prices.

(Reporting by Abhinav Ramnarayan, Additional reporting by Lisa Twaronite in TOKYO and Dhara Ranasinghe and Saikat Chatterjee in LONDON; Editing by Robin Pomeroy)