Global shares fall with focus on Fed and German election

NEW YORK (Reuters) - Global equities fell on Monday as nagging uncertainty over the Federal Reserve's policy stance offset an election triumph for German leader Angela Merkel and upbeat euro zone and Chinese data.

The euro took a tumble after European Central Bank President Mario Draghi said euro zone interest rates will remain at current or lower levels for an extended period of time.

"We had some good news out of China and Europe and the elections in Germany are favorable for the euro zone, but focus remains on the Fed," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

William Dudley, president of the Federal Reserve Bank of New York, said on Monday that the timeline that Fed Chairman Ben Bernanke articulated in June for scaling back the central bank's stimulus measures is "still very much intact.

The Fed surprised financial markets last week by deciding to stick with its program of buying Treasuries and mortgage-backed securities at a monthly pace of $85 billion, as it cited continued risks to the economy.

The Dow Jones industrial average was down 70.87 points, or 0.46 percent, at 15,380.22. The Standard & Poor's 500 Index was down 10.54 points, or 0.62 percent, at 1,699.37. The Nasdaq Composite Index was down 23.02 points, or 0.61 percent, at 3,751.71.

European shares on the FTSEurofirst 300 were down 0.7 percent at 1,254.023. MSCI's index of world shares was down 0.3 percent. World and European stocks hit a five-year high last week.

Despite the strong showing by Merkel's conservatives in Germany's general election on Sunday, the party appeared just short of the votes needed to rule on their own, while current coalition partner the Free Democrats suffered a humiliating exit from parliament.

"The result of the election should not be a big market mover in the short term as it was largely as expected. ... But the mid-term market implications loom large," Societe Generale said in a note, forecasting that a continuation of recent policies could push up inflation and erode competitiveness.

"We are aggressive sellers of German assets post the election. They should underperform other euro zone assets over the next quarters."

Stock markets also struggled on Friday's comments from a top Fed policymaker who hinted the U.S. central bank may not wait too much longer to phase out its huge stimulus program.

The negative sentiment largely offset strong data from Europe. Markit's September euro zone Flash Composite Purchasing Managers' Index (PMI) jumped to its highest level since June 2011 and beat expectations as new orders hit their fastest pace in over two years.

EURO FALLS

The euro was down 0.2 percent at $1.3496 after Draghi's comments offset Merkel's win.

But Nick Beecroft, chairman and senior market analyst for Saxo Bank capital markets, said Merkel's election win was "a ringing endorsement" for efforts to preserve the euro.

"The positive thing for the euro is that it is 99 percent certain we will have a grand coalition that will be able to change the (German) constitution if needed to allow euro bonds.

"This won't happen overnight but I expect it to gradually come onto the agenda," he added.

Commodity currencies were bid after a survey showed a promising pickup in Chinese export orders, another sign of stabilization in China, the world's second biggest economy.

The preliminary HSBC Purchasing Managers' Index for China climbed to 51.2 in September, from August's 50.1, with 10 out of 11 sub-indexes up in the month. Dealers had looked for a reading of around 50.9.

The Australian dollar rose 0.6 percent to $0.9449. China alone takes around one-third of all Australia's exports, chiefly commodities such as iron ore, the key raw material for steel.

Shares in Shanghai gained 1.0 percent and Taiwan's main index <.TWII> was up 0.9 percent on the same data.

BONDS FIRM

U.S. Treasuries prices rose on Monday ahead of the government's auction of new debt.

The benchmark 10-year U.S. Treasury note was up 4/32, with the yield at 2.72 percent.

Europe's bond markets were little changed after the German election, with German Bunds and most euro zone periphery debt faltering after a positive start.

In other markets, Brent crude oil was down 1 percent at $108.100 a barrel, while U.S. crude was down 1.3 percent at $103.42.

Gold rose 0.2 percent to $1,327.10 an ounce.

(Reporting by Nick Olivari; Editing by Leslie Adler)