By Marc Jones
LONDON (Reuters) - Shares and the euro trod water on Monday as an election triumph for Angela Merkel and upbeat euro zone and Chinese data helped balance renewed concerns about the Federal Reserve's policy stance.
Merkel's resounding win in Sunday's German elections, seen as an endorsement of her steady leadership during the euro zone crisis, was followed by forward-looking euro zone and Chinese PMI data both showing further signs of a pick-up.
Markit's September euro zone Flash Composite Purchasing Managers' Index (PMI) jumped to 52.1 from last month's 51.5, its highest since June 2011 and beating expectations for 51.9 as new orders hit their fastest pace in over two years.
Stock markets struggled for direction, however, put off by Friday's comments from a top Fed policymaker who hinted the U.S. central bank may not wait too much longer to phase out its huge stimulus program. The Fed surprised markets by not starting the process this month.
European shares on the FTSEurofirst 300 <.FTEU3> were little changed at 1,261.75 by midday, with a quiet start to the week expected on Wall Street<.N> after some sharp losses on Friday. World <.MIWD00000PUS> and European stocks hit a five-year high last week.
Merkel's victory gave the euro only the briefest of lifts, as she will still need a new coalition partner to rule, a deal that could take around a month to carve out.
But Nick Beecroft, chairman and senior market analyst for Saxo Bank capital markets, said Merkel's election win was "a ringing endorsement" for efforts to preserve the euro.
"The positive thing for the euro is that it is 99 percent certain we will have a grand coalition that will be able to change the (German) constitution if needed to allow euro bonds.
"This won't happen overnight but I expect it to gradually come onto the agenda," he added.
Having initially gained a quarter of a U.S. cent to $1.3555, the common currency last traded at $1.3511. Against the yen, it eased to 133.67 from an early 134.56, while it inched down versus sterling to 1.1867 per pound.
That left the dollar index <.DXY> slightly up from where it had traded in Asia at 80.416, but still not far from a seven-month trough of 80.060 plumbed last week.
SECOND-GUESSING THE FED
The Dow Jones industrial average <.DJI> lost 1.2 percent on Friday, while the S&P 500 Index <.SPX> eased 0.7 percent.
Some of the falls were attributed to comments from St. Louis Federal Reserve Bank President James Bullard, who said it was possible the Fed could start winding down its stimulus in October, depending on economic data.
That was a surprise to most analysts, who had thought there would not be enough fresh economic news by the October 29-30 meeting to swing the Fed from its accommodative course. Economists polled by Reuters expect a first cut to the Fed's $85 billion of monthly bond-buying in December.
Some clarity might come later on Monday, when three Fed officials are speaking, among them New York Fed President William Dudley. He is thought to be close to Chairman Ben Bernanke and to speak for the dovish majority of voting members.
"We think the hurdle for tightening in December is somewhat high, and thus believe that the time frame for tapering has most likely been pushed back all the way to March," said Michelle Girard, chief economist at RBS.
Even the thought the Fed might start tapering in October jolted commodity markets, leaving gold down at $1,323.14 an ounce, from Thursday's peak of $1,374.54. Copper futures were off 1.2 percent.
Brent crude oil was steady at $109.20 a barrel, while U.S. crude was also flat at $104.90.
Europe's bond markets were little changed after the German elections, with German Bunds and most euro zone periphery debt faltering after a positive start.
While Merkel won a landslide personal victory, the election result was not as clear-cut as she might have wanted. Her conservatives appeared just short of the votes needed to rule on their own, while current coalition partner the Free Democrats suffered a humiliating exit from parliament.
That left open the possibility of a "grand coalition" with the centre-left Social Democrats (SPD), who came a distant second. In the past, establishing a coalition accord has taken between four and eight weeks.
"The formation of a grand coalition could be a positive outcome for the euro zone," said Peter Dragicevich, a currency strategist at Commonwealth Bank of Australia.
"The SPD is in favor of further euro zone integration. As such, a grand coalition may be more willing to work with the ECB and euro zone governments to find a sustainable solution to the issues plaguing the euro zone periphery."
He noted one of the SPD's policy proposals was the creation of a European debt redemption fund funded by euro zone bonds.
Some Asian markets had earlier started the week with significant gains, thanks to a survey that showed a promising pick up in Chinese export orders, another sign of stabilization in the world's second biggest economy.
The preliminary HSBC Purchasing Managers' Index (PMI) for China climbed to 51.2 in September, from August's 50.1, with 10 out of 11 sub-indices up in the month. Dealers had looked for a reading of around 50.9.
New export orders jumped to a 10-month peak of 50.8, the first time in six months that exports have grown. Readings on manufacturing across Europe are due later on Monday.
Shares in Shanghai <.SSEC> gained 1.0 percent and Taiwan's main index <.TWII> was up 0.9 percent. Australian shares were down 0.5 percent and Japanese markets were closed for a holiday. MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dipped 0.1 percent on the day.
The upbeat China survey sent the Australian dollar a quarter of a U.S. cent higher to $0.9422. China alone takes around one-third of all Australia's exports, chiefly commodities such as iron ore.
(Editing by Catherine Evans)