European shares slip as easing expectations fade

[October 26, 2015]  By Lionel Laurent

LONDON (Reuters) - European shares fell in early trading on Monday as euphoria about the prospect of further central bank policy easing faded, with investors warning against over-confidence ahead of another week of interest rate decisions.

Comments on Monday from a key economic adviser to Prime Minister Shinzo Abe, who said the Bank of Japan did not need to boost its monetary stimulus as early as this week, have tempered expectations that Friday's policy review will see new action.

The monthly Ifo survey of German business morale dipped in October but beat forecasts, suggesting Europe's largest economy remains resilient in the face of a slowdown in emerging markets and the emissions scandal at carmaker Volkswagen.

Corporate expectations over a half-year horizon hit a seven-month high, suggesting many firms believe they can cope with the economic headwinds.

"We have had a pretty good rally in risk assets since the beginning of October ... Clients have only really got two or three more weeks to do anything before year-end and they are not going to take big positions going into December," said Sean Darby, a strategist at Jefferies.

"On Japan, people also may have read too much into the possible crossover from the ECB."

Bets that Japan's already massive stimulus would be increased had risen after China's cut interest rates last week and the European Central Bank indicated it may add to its asset purchase program in December. The U.S. Federal Reserve, which also meets this week, is also increasingly seen delaying its first rate increase for nearly a decade until next year.

Global equities, which have rebounded 10 percent from the depths of September's sell-off, were broadly flat on Monday, with the pan-European FTSEurofirst 300  index down 0.3 percent. MSCI's index of Asia-Pacific shares outside Japan edging up 0.1 percent.

Poland's benchmark equity index reversed early falls and rose 0.5 percent after the main opposition party Law and Justice won weekend parliamentary elections. The party confirmed its plan to introduce a banking tax as of January 2016, which hit bank stocks like PKO BP and mBank

There were some mixed updates from earnings season. French carmaker Peugeot  fell 2.4 percent after a trading update and Philips slid more than 1 percent after warning that the sale of its Lumileds division was in doubt.

The prospect of more central bank cash was seen supporting bond markets, with Italian and Spanish bond yields at nearly their lowest levels in half a year on expectations additional ECB stimulus will lift lower-rated euro zone bonds. German Bund yields hovered just above 0.50 percent.

There was little respite for commodities, with crude oil prices remaining weak as a slowing demand outlook implied oversupply would remain in place for months.

Iron ore futures in China and Singapore ticked lower amid pressure from a weak steel market, though copper prices edged higher.

(Editing by Catherine Evans and Nigel Stephenson)

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