European Markets Slip, Traders Eye Fed

European shares retreated on Wednesday, with investors taking a cautious stance ahead of a U.S. Federal Reserve policy meeting that might provide a clearer picture about the pace of economic recovery and give hints about any stimulus measures.

Philips Electronics slipped 11.4 percent after warning of sharply lower profit at two of its three key divisions. The STOXX Europe 600 personal and household goods index , down 1.1 percent, featured among the top fallers.

At 0811 GMT, the FTSEurofirst 300 index of top European shares was down 0.3 percent at 1,093.17 at 0811 GMT after rising 1.5 percent in the previous session.

Investors waited for the outcome of a two-day policy meeting of the U.S. Federal Reserve late on Wednesday and will scrutinise the comments of Chairman Ben Bernanke, who will likely acknowledge renewed weakness in the U.S. economy.

"It has been our view for a while that the largest source of uncertainty and nervousness is not Greece, not the economic slowdown but the end of the QE2 (quantitative easing)," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

"If the Fed were to indicate that it would continue running its printing presses under some form or another, it would certainly give the bulls some renewed and much needed ammunition. If they do not get it, the market will probably be disappointed."

Fed officials cut interest rates to near-zero in December 2008 and will have pumped $2.3 trillion into the economy by the time their bond purchases run their course at the end of this month in the hopes of spurring a stronger recovery.

"They will confirm that they will end the QE2 and will signal exceptionally lower rates for an extended period. They also have to adjust their forecasts a bit lower in terms of growth. We will probably see a pretty dovish Fed," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($473 billion).

Miners also lost ground, with the STOXX Europe 600 basic resources index falling 0.5 percent, mirroring weaker metals prices. Xstrata fell 0.6 percent.


Investors got some relief after the Greek government survived a vote of confidence, raising expectations the highly indebted country will introduce new austerity measures to secure emergency loans and avert a debt default.

Prime Minister George Papandreou's reshuffled cabinet aims to get parliament approval for a package of spending cuts, tax hikes and state asset sales by June 28 and then push through laws needed to implement it within the next two weeks to avoid missing out on 12 billion euros ($17 billion) in aid.

"The road ahead for Greece is still long, winding and full with mines. An important first step has been taken, however, there are still many more hurdles to be taken," Gijsels said.

Mohamed El-Erian, chief executive of the world's biggest bond fund PIMCO, predicted Greece and other European economies would default on their debts. He has suggested in the past that Europe risks wasting money for nothing by pumping billions of dollars into the ailing economy.

Among individual movers, Man Group rose 3.5 percent, extending gains made in the previous session on a revival of vague bid rumours, boosted by upbeat broker notes on the hedge fund manager from Credit Suisse, Goldman Sachs, and Citigroup.

Some fund managers stayed positive on stocks.

"We are still reasonably optimistic on equities, which offer better yields than bonds," said Romain Boscher, global head of equity at Amundi, which manages 691 billion euros. "Valuation multiples remain attractive."

The STOXX Europe 600 index traded at 10.2 times its one-year forward earnings, against its 10-year average of 13.4. (Additional reporting by Blaise Robinson in Paris)