European shares tread water with Fed decision looming

European shares ended flat on Wednesday, as gains for the defensive real estate and utilities sectors were countered by losses in luxury good makers, with caution prevailing ahead of the U.S. Federal Reserve's interest rate decision. After flitting between small gains and losses during the session, the pan-European STOXX 600 closed with a tiny 0.02% gain as investors awaited the U.S. central bank's monetary policy statement due at 1800 GMT.

With a rate cut from the U.S. central bank near-certain investors will be focussed on forward guidance, as policymakers are deeply divided on the need for further easing amid improving U.S. economic data. "It doesn't seem like there is a lot of expectations for a particularly dovish announcement," said Simona Gambarini, markets economist at Capital Economics in London. "We think the Fed will cut rates today and will follow up with another cut in December and that will be the end of the easing cycle."

Traders are currently pricing in a 72.7% chance of a quarter of a percentage point cut, below the 87% chance seen just a week ago, according to the CME Group's FedWatch tool. Stock markets were mixed after the European Central Bank's move last week to cut rates deeper into negative territory and relaunch bond purchases with no scheduled end-date.

Defensive sectors were in favour again, with real estate and utilities, which tend to move in the opposite direction to interest rates, rising about 1% and 0.9%, respectively. Shares in Italy's biggest utility Enel jumped 2%, helping the index of Milan-listed shares outperform its European peers. The index has gained about 10% from its August lows, largely due to the formation of a new government.

However, the new government of 5-Star Movement and the centre-left Democratic Party expects the economy to expand by only about 0.4% in 2020 after eking out 0.1% growth this year, sources close to the matter told Reuters. Other major country indexes closed marginally higher, although Greek stocks were prominent gainers, up 1.2%, after a Bloomberg report said the government planned to provide as much as 9 billion euros ($10 billion) in state guarantees to help banks reduce soured debt.

The benchmark index has gained about 42% so far this year. Luxury goods were a weak spot after brokerage UBS downgraded the sector to "neutral" from "overweight", saying the sector looked overbought.

"Any catalyst in the form of reduced uncertainty or greater confidence in the economic cycle could lead to a longer bounce back in value stocks and luxury goods would be on the wrong side of this movement should it materialise," UBS analysts led by Joao Toniato, wrote in a note. Swiss luxury goods group Richemont fell 6%, while shares in Italian luxury jacket maker Moncler dropped 7% after its chief executive said the ongoing unrest in Hong Kong could have an impact on its business this year.

Among other decliners, DHL owner Deutsche Post fell 1.2% following U.S. rival FedEx's profit warning overnight citing the U.S.-China trade war. Other European mail delivery firms, DSV, Kuehne & Nagel and Royal Mail also fell.

French utility EDF gained 3.2% after it said there was no need to close any of its nuclear reactors for now following the discovery of problems with weldings. Apple Inc's component suppliers AMS, STMicro and Infineon posted some of the biggest gains on the European technology subsector after strong pre-orders for the latest iteration of iPhone.

 

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