* German elections weigh on euro, bonds
* World stocks lower after rally, oil slips
* Wall Street set to open flat to slightly higher
* Middle East, North Africa and Japan weigh
By Jeremy Gaunt, European Investment Correspondent
LONDON, March 28 (Reuters) - The euro weakened on Monday
after German Chancellor Angela Merkel's conservatives were
routed in elections in a key state, while world shares eased
back after their recent rally.
Wall Street looked set to open flat to slightly higher after
the S&P 500 <.SPX> had its best week in seven.
Concerns also lingered in equity markets about reports of
soaring radiation levels at a damaged nuclear plant in Japan,
and about the impact of the fighting in oil-producer Libya,
although oil prices slipped back to $115.18 a barrel after
rebels regained control of key Libyan oil towns.
Merkel's conservatives lost power in regional stronghold
Baden-Wuerttemberg on Sunday, with early poll results showing
the Greens, buoyed by Japan's nuclear crisis, surging to their
first state premiership. []
Barclays Capital said in a note that the result meant
Merkel, the leader of Europe's largest economy, would be more
reliant on support from opposition parties and that it could
feed uncertainty about political support for a euro zone bailout
package.
The euro eased against the dollar as a result, down 0.3
percent to around $1.4040 <EUR=> but the dollar was also aided
by hawkish comments from some Federal Reserve officials.
"It is a combination of setbacks to German Chancellor Angela
Merkel's party and the U.S. dollar being lifted by those
comments from the Fed officials which led some investors to
short the euro," said Adam Myers, senior currency strategist at
Credit Agricole.
St. Louis Federal Reserve President James Bullard said on
Saturday that lengthening the "extended period" of low interest
rates could encourage a liquidity trap. []
His remarks followed comments on Friday from Philadelphia
Federal Reserve Bank President Charles Plosser, who said the Fed
would have to reverse its easy money policy in the
"not-too-distant future" to avoid sowing the seeds of inflation.
[]
WEAKER SHARES
World shares as measured by MSCI <.MIWD00000PUS> were down
around 0.3 percent with the pan-European FTSEurofirst <>
up 0.1 percent.
Japan's Nikkei <> earlier closed down 0.6 percent.
The slip in global sentiment followed a fairly strong rally
last week that belied the overall negative news from
disaster-hit Japan and turmoil in the Arab world.
"We had a nice bounce last week. Markets have been resilient
in the face of some hideous news," said Justin Urquhart Stewart,
director at Seven Investment Management.
The Western-led military intervention in Libya was allowing
rebel forces to gain ground. Syria deployed its army to the
country's main port over the weekend in an attempt to rein in
spreading protests across the country, while in Yemen talks
stalled between the government and opposition. []
[]
The price of crude fell though, with Brent <CLc1> down 50
cents at just over $115 a barrel after Libyan rebels regained
control of key oil towns and a rebel official said oil output
could be increased. []
The price of gold <XAU=> fell nearly 1 percent, pressured by
a firmer dollar.
In bond markets, German government bond prices traded lower
after the election result.
Yields on Portuguese government bonds, meanwhile, hit new
euro lifetime highs after Standard & Poor's cut the credit
ratings of five Portuguese banks.
Yields on five-year bonds <PT5YT=TWEB> jumped to as high as
8.764 percent, putting further pressure on Lisbon to seek an
international bailout as it faces snap elections which could
make it difficult for Lisbon to finance itself ahead of bond
redemptions in April and June. []
(Additional reporting by Brian Gorman and Anirban Nag; Editing
by Susan Fenton)
