European shares dip ahead of US Fed decision

PARIS (REUTERS) - European shares ended slightly lower on Wednesday in thin trading volumes, as investors awaited clues from the US Federal Reserve about whether or not it will soon start to wind down its stimulus measures.

Investors avoided increasing their exposure to equities ahead of the Federal Open Market Committee's (FOMC) policy decision, and Fed Chairman Ben Bernanke's press conference, both due after European markets' closing bell.

The Fed will likely say that it will keep buying bonds at a monthly pace of US$85 billion (S$105.93 billion), while keeping its options open to trim the quantitative easing programme later in the year if the US labour market continues to pick up.

"Stocks have sharply dropped since late May, with the market now pricing in a cut of US$20 billion in September or October on the amount of bonds bought every month," said Mr David Thebault, head of quantitative sales trading, at Global Equities.

"So in terms of positioning, the risk for equities ahead of the FOMC is neutral to slightly on the upside, I'd say."

The FTSEurofirst 300 index of top European shares closed 0.3 per cent lower, at 1,180.21 points, after spending the session in a tight range. The euro zone's blue-chip Euro STOXX 50 index ended 0.6 per cent lower, at 2,683.98.

Hardest-hit were Spain's IBEX, down 1 per cent, and Italy's FTSE MIB, which slipped 0.9 per cent.

Despite the session's losses for the overall market, the Euro STOXX 50 volatility index, Europe's 'fear gauge', fell 2 per cent and hit its lowest level in a week, a sign that investors were relatively sanguine ahead of the Fed decision.

The Euro STOXX 50 has lost nearly 6 per cent in the last three weeks on worries that the Fed could soon start to scale back its stimulus. Fixed income assets have suffered even more, with investment data showing a big switch out of credit and bonds.

"Until recently, credit, and especially high yield, was probably the most popular asset class among yield-deprived investors, with high levels of inflows giving a reassuring'feel' of liquidity in the secondary market. But no longer, "Societe Generale strategist Arthur van Slooten wrote in a note.

"Meanwhile, investors have started to return to cash rather than to equities as suggested by adepts of the big rotation thesis."