Europe sharply lower on German government instability

Shares in Europe traded sharply lower Monday morning as investors questioned the stability of the German government and wider trade links between the European Union and the U.S.

The pan-European Stoxx 600 was 0.7 percent lower with every sector in the red. The German Dax started the day leading the falls across the major European bourses, but it has recovered since then, currently off by 0.3 percent. In terms of sectors, basic resources were the worst performers, down by 1.7 percent, followed by banking stocks, down by 1.5 percent.

Market players are following news that the German interior minister has offered to resign over differences with Chancellor Angela Merkel on migration. Horst Seehofer, also leader of the sister party of Merkel’s CDU (Christian Democratic Union), is a key player in the current German government and his potential withdrawal could jeopardize Merkel’s future as chancellor.

Meanwhile, the European Union has threatened to impose new retaliatory tariffs worth $300 billion if the U.S. moves forward with penalties on European cars, the Financial Times reported. Furthermore, the White House has prepared a draft bill that allows it to unilaterally increase tariffs without the approval of Congress, Axios reported.

Investors also monitored new data releases. Unemployment numbers in the euro area fell in May putting the jobless rate at 8.4 percent across the 19 countries. Separately, the IHS Markit manufacturing purchasing managers’ index fell to a 18-month low in June on concerns over growing trade barriers.

In London, the FTSE 100 was down 0.9 percent as tensions over Brexit continue within Prime Minister Theresa May’s cabinet and a new poll showed a record 75 percent of major British companies were now pessimistic about leaving the EU.

Emerging-market stocks retreated, giving up almost half of Friday’s gain, while developingnation currencies also fell. Mexico’s peso reversed gains following the country’s presidential elections. The yuan weakened, resuming its sharpest drop since China’s August 2015 devaluation.