Euro shrugs off German impasse as stocks struggle

The euro reversed early losses to trade higher as investors judged the failure of German Chancellor Angela Merkel's coalition talks unlikely to harm the outlook for the region's economy. Sterling strengthened after reports the U.K. may make concessions to smooth Brexit negotiations.

The Stoxx Europe 600 Index steadied even as Germany's DAX gauge touched a sevenweek low. Earlier, Chinese equities reversed losses as markets took a closer look at plans to curb shadow banking. In the U.S., the gap between two- and 10-year Treasury yields again hit the tightest level in a decade, adding to concern about the pace of future economic growth. The dollar was steady.

Investors returned to their desks this week with a fresh reminder of political risk in Europe. A month of exploratory coalition talks in Germany ended in a dramatic collapse on a dispute over migration policy. The upshot is that Europe's dominant country remains ham- strung on the global stage, potentially affecting everything from policy toward the European Union, Turkey and Russia to government spending.

"You can imagine this will be bearish for the euro, at least in the tactical near-term, while the market comes to grips with what's going on and will take a look at what her options are," Kay Van-Petersen, global macro strategist at Saxo Capital Market, said in an interview with Bloomberg Television. "I'm fairly confident though that she'll be able to come up with a different coalition at some point over the next few weeks."

Meanwhile, pound and gilts traders will focus on a potential downgrade to the U.K. growth outlook this week and the government's efforts toward agreeing a Brexit divorce bill. Sterling was boosted on Monday by reports that the U.K. was preparing to make an enhanced divorce bill offer to the EU ahead of crucial talks starting next month.

The pause in the rally in risk assets globally comes as investors try to gauge whether there are sufficient drivers to continue the march to historic highs. Strong earnings and solid global growth are balanced against lofty valuations in some markets, as well as the negative signal from the U.S. yield curve, where longer-dated Treasuries are yielding less of a premium over shorter ones.

Elsewhere, bitcoin topped $8,000 for the first time as investors set aside technology concerns that saw it tumble as much as 29 percent this month. West Texas oil held gains above $56 a barrel after Friday's surge on Saudi Arabia's supply cut extension plans.

Volumes may be lower than average this week due to the Thanksgiving holiday in the U.S. Minutes from the Reserve Bank of Australia's November meeting are due Tuesday, while those from the European Central Bank's October meeting due out could show dissent in the discussion about tapering.

Federal Reserve Chair Janet Yellen gives a talk at New York University. Reports on sales of previously owned homes and durable goods orders for October are due in the US The minutes from the Fed's latest policy meeting are out.