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Global markets flat as Merkel mulls coalition options

LONDON Markets started the new week leaden-footed Monday despite solid economic indicators out of China and Europe and an unexpectedly strong showing by Chancellor Angela Merkel in Germany's national elections.

Though posting its best performance in 23 years in Sunday's election, Merkel's center-right bloc fell just short of an overall majority and will have to find a new coalition partner after its previous one failed to pass the 5 percent threshold needed to get parliamentary representation.

Merkel looks likely to end up leading either a "grand coalition" government with the center-left Social Democrats of defeated challenger Peer Steinbrueck -- reviving the alliance that ran Germany in her first term -- or, less likely, with the Greens.

Whatever emerges over the days and weeks ahead, few analysts think there will be a fundamental change in policy within Germany and the wider 17-country eurozone -- hence the lack of reaction in financial markets.

"She is likely to end up governing as part of a grand coalition with the Social Democrats, but we expect no major policy changes," said Jennifer McKeown, senior European economist at Capital Economics. "Germany will continue to advocate austerity at home and in the region's periphery and make only slow and small steps towards fiscal union."

In the wake of the results, Germany's main stock index, the DAX, was 0.1 percent lower at 8,670. Trading elsewhere in Europe was similarly lackluster, with the FTSE 100 index of leading British shares down 0.2 percent at 6,582 and the CAC-40 in France up 0.1 percent at 4,208.

The euro was also little changed, trading 0.1 percent lower at $1.3513.

Markets in Europe were unaffected by a survey suggesting that the economic recovery across the 17 European Union countries that use the euro is picking up and that unemployment may be peaking. The composite purchasing managers' index -- a gauge of business activity across the manufacturing and services sectors published by financial information company Markit -- rose for the sixth month running to a 27-month high of 52.1 points in September from 51.5 in August. That's further above the 50 threshold that indicates expansion and is the latest indicator to suggest the eurozone economic recovery is gathering pace.

Wall Street was poised for a steady opening too, with Dow and S&P 500 futures up 0.1 percent, ahead of a run of speeches from policymakers at the Federal Reserve, which last week surprised markets by opting to not reduce its monetary stimulus. Investors will also be keeping an eye on discussions in Congress over raising the debt ceiling. Lawmakers need to agree to raise the debt ceiling by Oct. 1 to avoid a government shutdown, and a potential default on payments, including debt, later in the month.

Earlier in Asia, a positive Chinese manufacturing survey had little impact outside of Shanghai. HSBC said its monthly purchasing managers' index for China rose to 51.2 points from 50.1 in August. The data breathed some life into Chinese markets, with the Shanghai Composite Index rising 1.3 percent to 2,221.04 and the smaller Shenzhen Composite Index spiking 2.2 percent to 1,059.74.

"While the good news from China was encouraging, it's not a game-changer. It's just cementing or building the picture that we've had out of China for a couple of months," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

Elsewhere in Asia, trading was subdued. Japan's stock market was closed for a public holiday while a powerful storm forced Hong Kong markets to close in the morning. In the afternoon, Hong Kong's Hang Seng fell 0.6 percent to 23,371.54. South Korea's Kospi rose 0.2 percent to 2,009.41 while Australia's S&P/ASX 200 fell 0.5 percent to 5,252.50.