Markets edgy as German president demands responsibility after coalition talks collapse –as it happened

All the day's economic and financial news, as investors digest Angela Merkel's failure to reach a deal with Germany's Free Democrats.

• Latest: Steinmeier says all parties have duty to break deadlock
• Euro fell then recovered amid political uncertainty
• Could FDP support minority administration?
• Introduction: Jamaica? No, the FDP walked out
• Coalition talks floundered over climate change and migration
• Experts: Merkel damaged by coalition breakdown

7.35pm GMT

A late PS.... Could Germany be heading for new elections?

Philip Oltermann reports from Berlin:

Angela Merkel has indicated that she would rather have fresh elections than try to rule in a minority government as the collapse of German coalition talks posed the most serious threat to her power since she became chancellor more than a decade ago.

Merkel, who has headed three coalitions since 2005, said she was "very sceptical" about ruling in a minority government and suggested she would stand again as a candidate if elections were called in the new year, telling public broadcaster ARD she was "a woman who has responsibility and is prepared to take responsibility in the future".

Related: Merkel hints fresh elections preferable to minority government as talks fail

3.03pm GMT

Time for a recap.

European investors are bracing for fresh upheaval after Germany's coalition talks collapsed overnight.

If the grand coalition was to be renegotiated and went ahead, this would mean political stability in Germany and support for risk assets like equities and corporate bonds. I expect that the SPD would be able to push through more of their agenda and this might mean further steps towards European integration, reaching out to Macron.

If however negotiations between CDU/CSU and SPD fail and we are heading towards a minority government or even snap elections, I would expect to see market volatility increase due to rising political uncertainty in Europe's economic powerhouse.

2.44pm GMT

A clip of Frank-Walter Steinmeier speaking this lunchtime, complete with subtitles for English readers:

Unprecedented political turmoil in modern Germany

After collapse of #Germany's coalition talks, President #Steinmeier reminds political parties of their responsibility to voters to form a government: pic.twitter.com/0lWN0RgAMd

2.42pm GMT

Teneo Intelligence have kindly sent over an explanation of how Germany's political system will proceed, following the breakdown of the 'Jamaica coalition talks' last night.

2.40pm GMT

Here's a photo of German Chancellor Angela Merkel meeting with President Frank-Walter Steinmeier today.

2.26pm GMT

Over in Brussels, European Central Bank president Mario Draghi is testifying to MEPs.

The EU Treaties gave the ECB the primary objective of maintaining price stability in the euro area as a whole. This is the best contribution we can make to the welfare of our fellow citizens.

Ensuring price stability is a precondition for the euro area economy to achieve a balanced growth path that can be sustained in the long run. But this is not the only condition.

2.03pm GMT

The key part of Frank-Walter Steinmeier's statement came when he urged all political parties to consider helping to form a new government.

The German president said:

"All political parties elected to the German parliament have an obligation to the common interest to serve our country.

"I expect from all a readiness to talk to make agreeing a government possible in the near future."

1.45pm GMT

1.44pm GMT

Newsflash: German president Frank-Walter Steinmeier is delivering a statement in Berlin now, following his meeting with Angela Merkel.

Steinmeier says that Germany faces an unprecedented situation, following the breakdown in coalition talks between the CDU/CSU, the FDP and the Greens.

No surprise that Steinmeier is calling for cooperation -calling new elections is a prolonged complicated process

Federal President #Steinmeier speaks of situation without precedent, responsibility for the country goes beyond parties' self-interest, expects readiness for talks from all political parties, will talk to leaders of all political parties & constitutional bodies #Germany #Art63GG pic.twitter.com/2yfzZAZ4qR

German President Steinmeier calls on coalition parties to "reconsider". All options likely to be explored to avoid new elections.

1.24pm GMT

Germany's Social Democrats, who came second in September's election, are sticking to their policy of not joining a grand coalition with Angela Merkel.

That's according to a party document seen by Reuters, which reports:

"Given the results of the Sept. 24 election, we are not available for entry into a grand coalition," read a SPD paper due to be discussed by party leaders that was obtained by Reuters.

"We are not afraid of new elections."

SPD leadership decides unanimously against new coalition with Merkel's CDU - some in the party disagree, but unlikely this will change much. https://t.co/eNPeoe7DJc

12.45pm GMT

European stock markets have now recovered their earlier losses as traders await news from the Merkel-Steinmeier talks.

Political analyst Nina Schick suggests the political uncertainty could last for months, though, meaning traders will remain nervous.

Merkel has finished her talk w/ Gerrman President Frank-Walter Steinmeier (who will call new elections if it comes to that.) Minister President of NRW, Armin Laschet, says that CDU will continue to support Merkel. (Whatever the outcome, she's weakened tremendously.)

The price that @SPD will likely demand in return for another GroKo is that Merkel goes. That would be a non-starter for CDU (right now.) So it's minority gov't or new elections. Unlikely that we will have new German gov't until well into 2018. Bad news for Brexit.

12.38pm GMT

Here's our latest report from Berlin.

Related: Angela Merkel meets German president as coalition talks fail

12.29pm GMT

Angela Merkel's political difficulties could be bad news for the UK over the Brexit talks.

Mihir Kapadia, CEO of Sun Global Investments, reckons it will be hard for the chancellor to give Britain any concessions, as she'll have to take a 'pragmatic' approach.

She will be preoccupied with domestic issues and unable to assume a leadership role in the EU.

She was expected to return to the European fray as the leader of Germany and push for a faster more pragmatic approach which would be more favourable to the UK. However, she will now be mired in domestic political difficulties and will not have the time or the perceived authority to take a lead in Europe. The vacuum will be filled in part by a more pro-EU stance by Mr Macron.

12.00pm GMT

Analysts at Citigroup say the euro is being propped up by several factors - including the lack of clarity over German politics right now.

Citi has 3 explanations why the collapse of Merkel's coalition talks in #Germany has not seen a stronger blow to Euro.
1. It was already discounted
2. The market was positioned short ahead of the announcement
3. There is too little clarity to trade pic.twitter.com/7HIZNCzKWp

11.44am GMT

Over in Berlin, Angela Merkel arriving for a meeting with German President Frank-Walter Steinmeier at Bellevue Palace, his official residency.

Merkel will brief Steinmeier about the state of the coalition talks (nicht sehr gut!). Steinmeier is then expected to give a statement around 2.30pm local time (1.30pm GMT)

11.22am GMT

Euro volatility has risen this morning, suggesting that traders are more nervous about Europe's prospects.

But...we're nowhere near the levels seen in April, when Emmanuel Macron and Marine Le Pen were battling for the French presidency, as this chart shows:

Volatility spiked ahead of the French election, which turned out to be a boon for markets as Emmanuel Macron was easily elected President of France. The market got the level of risk wrong back in April, and were overly worried, could they be wrong this time and be overly complacent?

How this saga plays out in the coming days will be crucial for European traders. It's not beyond the realm of possibility that Germany could end up being the biggest political hot potato for the Eurozone this year.

10.28am GMT

A quick reminder of the result of September's election shows why Angela Merkel is in a bind.

#SPD won't be able to get support for a Grand Coalition. But it cannot stick with "We are going into Opposition" either. So has to offer minority government to Merkel. If #SPD is smart, it offers it *together with Greens and FDP*.

10.21am GMT

Here's a chart of the euro's sharp moves against the US dollar this morning:

Check out this #EURUSD chart, the Merkel "smile" as the euro brushes off German political uncertainty. pic.twitter.com/YtzXW02z35

10.01am GMT

A flurry of headlines from Germany are helping the euro to claw back some of its earlier losses.

The Free Democrats have apparently signalled that they could support a minority government made up of the CDU-CSU bloc and the Green party.

"If there are good initiatives, then we are available."

FDP floor leader Buschmann tells Bild his party doesn't want fundamental opposition, but play a constructive role by supporting a minority government https://t.co/YDRiZtOmBz

Germany's FDP would support a minority Merkel government, Bild reports, citing FDP's chief whip Marco Buschmann https://t.co/pseRzJfgjI

As Merkel seeks Plan B, DAX, euro/$ and 10-yr bund yield recapture early losses. Economics trumps politics again? Or a bet on minority govt? pic.twitter.com/xtIBuFPwGl

9.52am GMT

Dutch foreign minister Halbe Zijlstra has warned that the collapse of German coalition talks last night is 'bad news' for Europe.

Zijlstra told reporters in Brussels that:

"Germany is a very influential country within the EU so if they don't have a government and therefore don't have a mandate it'll be very hard for them to take positions."

9.30am GMT

Peter Thal Larsen, European editor at Breakingviews, sums up the situation:

Mugabe holding onto power and Merkel possibly losing it were headlines I did not expect to wake up to this morning.l

9.10am GMT

Political economics professor Henrik Enderlein says Angela Merkel has been "seriously weakened", with no easy way forward.

Implications of coalition talk collapse:
- no strong + stable gvt before fall 2018 at the earliest
- minority gvt possible, but untested, unlikely can last for long
- Merkel seriously weakened - end of era near
- leadership gap in - all eyes on Macron#Jamaica

Cruel for #Merkel: Constitution provides script for internal CDU-CSU coup against her. She must ask Bundestag to elect her Chancellor. Her problem is not she won't be elected, but number of missing CDU-CDU votes in this anonymous election. Dream moment for her enemies.

Option 1: Grand Coalition. Highly unlikely as durable solution. Transition to snap elections at best.

Option 2: Minority government tolerated by SPD. See option 1.

Option 3: Snap elections. Difficult right now. Don't expect them before late spring 2018.

9.02am GMT

The possibility that Angela Merkel could be forced out of the German Chancellery will worry the City, says Rebecca O'Keeffe, head of investing at interactive investor.

"European equity markets have picked up where they left off last week, heading lower after the FDP walked out of German coalition talks. Angela Merkel has been the glue that has held the European Union together for the past 12 years, a stable force in turbulent times.

Chancellor Merkel is also one of the few European politicians who has demonstrated she may be prepared to compromise with Britain, rather than run the risk that Prime Minister May is replaced by a hardline Brexiteer. With almost unsurpassed political experience, markets will want Germany to find a quick solution, preferably one that leaves Mrs Merkel in situ.

8.50am GMT

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8.50am GMT

Ulrich Speck, senior research fellow of the Elcano Royal Institute think tank, says the collapse of the Jamaica coalition talks could be a major moment in German politics, and beyond.

With the failure of coalition talks, Germany is entering uncharted waters. We may see just see a (long) delay, with Merkel getting another term. Or we see the reshuffling of German politics that was supposed to come 2021 with the end of the Merkel-type of stability.

It is a mistake to think that if Berlin is unable to act, Paris will play a bigger role in the EU. If Berlin is unable to act, the EU is unable to act as well. Less Germany does not mean more France, it means less joint European action.

"Instability" in Berlin = problem is not what happens, but what doesn't happen. At a moment when Europe needs strong joint German-French leadership on many issues, Berlin is unable to deliver. Otherwise, even with a caretaker government, there will be continuity.

8.49am GMT

The pound is gaining ground against the euro this morning, up 0.25% at a1.1235.

8.44am GMT

Angela Merkel will meet with Germany's president, Frank-Walter Steinmeier, later today to discuss the situation.

Steinmeier is a leading figure in the left-wing Social Democrat party - who came second in September's election but refused to enter another Grand Coalition.

As a point of historical note, there is no precedent for fresh general elections so quickly after the previous one. I would not want to second guess this situation, but with Steinmeier being president, and the risk that any or all of the CDU, SPD and FDP take a hammering if fresh elections are held, it might be the compromise outcome.

8.28am GMT

Germany's DAX stock index has fallen by half a percent at the start of trading in Frankfurt.

Postal operator Deutsche Post, financial group Deutsche Bank and industrial giant Thyssenkrupp are leading the fallers.

With this bombshell development heightening concerns over political instability in Europe's largest economy and sparking speculation of fresh elections, the Euro may be in store for further punishment.

Although Europe's encouraging macro fundamentals may offer some background support to the Euro long term, political risk has the ability to trigger further selloffs in the shorter term.

8.15am GMT

Germany's coalition conundrum puts the whole future of Europe into doubt, says Dean Turner of UBS Wealth Management.

He told Bloomberg TV that:

The clear risk is that if Angela Merkel was not going to continue as chancellor, what would that mean for Europe?

With Emmanuel Macron elected in France, the push to rebuild the Franco-German alliance, to restructure Europe and make new reforms would be put into question.

8.10am GMT

The FT's Tobias Buck has a good explanation of why Merkel and the Free Democrats couldn't reach a coalition deal.

Among the core differences was the issue of refugee and asylum policy and, in particular, the issue of whether refugees should be allowed to bring their families to Germany.

In 2016, at the height of the Syrian refugee crisis, Berlin suspended that right. But the freeze on family reunifications runs out next year, raising the prospect of a spike in new arrivals.

7.59am GMT

Our correspondent in Berlin, Philip Oltermann, says Merkel's position as Germany's leader is now under scrutiny, following the collapse of coalition talks.

He writes:

With talks now seemingly over, Merkel could seek to form a minority government, either with the FDP or the Greens, and gather support from other parties on individual policy votes.

The Social Democrat leader, Martin Schulz, whose party has played junior partner to Merkel in the German government for the past four years, ruled out the possibility of another grand coalition under his leadership. "The voter has rejected the grand coalition," Schulz said at a party conference in Nuremberg on Sunday.

Related: German coalition talks collapse after deadlock on migration and energy

7.47am GMT

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"News emerging from Germany that Angela Merkel has failed to form a coalition within deadline has thrown the country into a state of political disarray for the time being, which could have a detrimental effect on the eurozone as a result.

"Germany is renowned for being the economic powerhouse of Europe in recent times, and has consistently contributed to its growth in the first three quarters of this year. Despite the single currency remaining strong for now and the eurozone stimulus programme going to plan, the ECB may choose to approach the situation in Germany with caution until political matters becomes clearer.

Related: 'No unemployed' gaffe adds to budget pressure on Philip Hammond