European Markets Slip Ahead of Fed

European shares edged lower on Tuesday, pressured by weakness in carmakers following a fall in demand for autos last month, but the market remained close to 5-year highs after a strong rally.

Eyes were on the U.S. Federal Reserve ahead of a policy meeting expected to confirm a slowing down of its stimulus programme.

The car sector was the biggest faller, down 1.3 percent, after the Association of European Carmakers said European car sales fell 4.9 percent last month.

German car parts and tyre-maker Continental AG shed 3.5 percent, the top faller on the FTSEurofirst 300 . Traders pointed to news that major shareholder Schaeffler had placed shares in the group worth 950 million euros to cut debt.

"The auto data shows there's still some structural issues in Europe ... and if the Fed announces some tapering, that will help this profit-taking we're seeing," Joe Rundle, head of trading at ETX Capital, said. "And then there will be a bit of a pullback which will be a good opportunity to buy.

The Fed's committee begins a two day meeting on Tuesday which is set to signal the start of the "tapering" process, with asset purchases expected to be reduced by $10 billion a month.

Rundle said the market was expecting a dovish tone to the Fed's announcement, so only the maintenance of the current pace of purchases would see the rally continue without a pause.

The pan-European FTSEurofirst 300 was down 0.4 percent at 1012 GMT to 1,254.44, having closed at 1,258.42 in the previous session - its highest close since June 2008.

The index surpassed its May peak for the year, reached before Fed Chairman Ben Bernanke first indicated to the market that the bank's equity-friendly stimulus programme would likely be scaled back later in 2013.

The FTSEurofirst has rallied 5.2 percent since the start of September, and 12.9 percent since June's lows made after Bernanke's first comments on reining in the Fed's "quantitative easing" programme.

"We've already had the QE tapering shock back in May/June when it was first mooted ... so markets aren't happy about QE being reined in, but I don't think it will cause a massive meltdown," said David Jones, chief market strategist at IG.

Citi upgraded its targets on European stocks, recommending that investors "keep buying dips" and raising its 2014 target on the DJ Stoxx Europe 600 to 370. Currently the index trades at 312.55

"There may be better near-term entry points, but we see healthy (circa) 25 percent returns to the end of 2014," analysts at Citi said in a trading note.