European stocks drifted lower, and the single currency weakened, in early Monday trading as investors struck a cautious note after Chancellor Angela Merkel won a smaller-than-expected victory in Germany's federal elections and indicated a new government may not be in place until Christmas.

Merkel's Christian Democrats (CDU) and their sister party, the Christian Socialists (CSU), polled at around 32.7% in the national vote, comfortably ahead of the 20.2% tally earned by their chief rival, the Social Democrats, led by former European Parliament President Martin Schulz.

However, both the CDU/CSU pairing, as well as the SDP, saw significant slippages in their overall vote share, with a major portion of those lost votes going to both the far-right Alternative for Deutschland Party (Afd) and the Free Democratic Party. In fact, the Afd was by far the biggest gainer in Sunday's federal German elections, boosting its support by more than 8.5% and earning 13.5% of the national vote. Under Germany's electoral system, that's likely to translate into around 90 seats in the Bundestag, making it the third-largest sitting political party in the parliament of Europe's biggest and most important economy.

The far-right's gains could color Chancellor Angela Merkel's attempts to form a coalition government, and possibly force her to take a more inward-looking approach to Germany's financial and political relationship with Europe as she reaches out to her FDP and Green party rivals, each of which have expressed various levels of concern with the Brussels consensus of "ever closer Union".

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