European Shares Little Changed; Fed Decision Awaited

Reuters

European shares extended the previous session's strong gains in choppy trading on Wednesday, led by cyclical stocks, with investors nervously waiting to see if the U.S. Federal Reserve announces further stimulus measures to support the economy.

The Fed concludes a two-day policy meeting later in the day. Some investors expect the central bank will extend its bond-buying programme, dubbed Operation Twist, in which it sells bonds with maturities of three years or less and buys securities with maturities of six years and longer.

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The programme, aimed at pushing down longer-term interest rates to shield the still-fragile U.S. economy, expires this month.

Analysts said recent poor data raised hopes the Fed would adopt further monetary stimulus measures to support the economic recovery, although some investors believed the central bank might leave the policy unchanged today and announce a fresh round of quantitative easing in its next meeting.

"Operation Twist is more likely than any measures in terms of printing new money or a further round of quantitative easing, but with bond yields as low as they are at the long end, I don't see that having much economic significance," Gerard Lane, strategist at Shore Capital, said.

At 0919 GMT, the FTSEurofirst 300 index of top European shares was up 0.1 percent at 1,010.52 points after surging 1.6 percent to a one-month high in the previous session.

Graham Bishop, equity strategist at Exane BNP Paribas, said shares could trim recent strong gains if the Fed failed to announce any fresh measures, but the drop was seen limited as there were plenty of investment opportunities.

DEFENSIVES SUFFER

"But if we see some positive action from the Fed, that will be the start of a wider move in equities. It will signal that they are likely to do more in terms of quantitative easing," he said and added: "Directionally, we are bullish on equities and see a 15 percent upside potential by the year end."

Bishop said he was "long" on cyclicals such as mining, industrial and chemicals, but was "underweight" on defensive sectors such as food and beverages, which were relatively expensive in terms of valuations.

Defensive shares lost ground on Wednesday, with the STOXX Europe Food and Beverages index falling 1.3 percent to top the losers' list. On the other hand, cyclical shares such as banks, up 1.2 percent, were in demand.

Analysts said there was a case for central banks to launch supportive measures to boost the pace of economic recovery and that could happen sooner, rather than later.

Minutes to the Bank of England's June 6-7 policy meeting showed on Wednesday that it is on the verge of approving another round of monetary stimulus, with Governor Mervyn King supporting an extra 50 billion pounds of gilt purchases.

Societe Generale said in a note that investors should take profits on the strong gains in U.S. equities, switching instead to Britain and even possibly the euro zone.

It increased exposure to Europe-ex UK to 7 percent from 5 percent, though still staying underweight, while halving the exposure to U.S. to 14 percent, in the quarterly review of its multi-asset portfolio.