European shares edge higher as investors await Fed meeting

[July 29, 2020]  By Elizabeth Howcroft

LONDON (Reuters) - European shares rose on Wednesday, but a resurgence of COVID-19 cases kept investors cautious as they awaited news from the U.S. Federal Reserve's latest policy meeting.

Wall Street closed lower on Tuesday and the negative sentiment continued through the Asian session, with Japan’s Nikkei falling on a rising yen and a weak start to the corporate earnings season.

The MSCI world equity index <.MIWD00000PUS>, which tracks shares in 49 countries, was flat at 1007 GMT, while mixed corporate earnings sent MSCI's main European Index down by a quarter of a point <.MSER>.

Europe's STOXX 600 was up 0.1% <.STOXX>, Germany's DAX was down 0.1% <.GDAXI> and France's CAC 40 gained 0.7% on the back of a flurry of better than feared results, including from heavyweight luxury group Kering <PRTP.PA> <.FCHI>.

Spanish bank Santander <SAN.MC> reported a record second-quarter loss while Germany's Deutsche Bank gave a slightly improved outlook.

"Global stock markets appear to be starting to get a little wobbly as the latest earnings numbers start to paint a picture of a global economy that could start to face a challenging time in the weeks and months ahead," wrote Michael Hewson, chief market analyst at CMC Markets UK.

"The resurgence of coronavirus cases starting to get reported across the world is prompting the realisation that hopes of a V-shaped recovery are starting to look like pie in the sky."

Deaths from coronavirus in the United States registered their biggest one-day increase since May on Tuesday, with this month's spike in infections having forced some states to make a U-turn on the reopening of their economies.

Asia and Europe have also been hit by new surges in COVID-19 infections, with several countries imposing new restrictions and Britain imposing 14-day quarantines on travellers from Spain.

Global airlines cut their coronavirus recovery forecasts on Tuesday, saying it would take until 2024 - a year longer than previously expected - for passenger traffic to return to pre-crisis levels.

The dollar index fell in early London trading, hitting two-year lows before firming slightly <=USD>.

As sentiment soured, high-grade euro zone bond yields dropped to their lowest in more than two months. The German 10-year yield was at -0.505%, having hit as low as -0.521% <DE10YT=RR>.

Bundles of banknotes of U.S. Dollar are pictured at a currency exchange shop in Ciudad Juarez, Mexico January 15, 2018. REUTERS/Jose Luis Gonzalez

"It should be clear to investors that the virus itself is not going away," said David Riley, chief investment strategist at BlueBay Asset Management.

"It’s something that’s going to be there having an impact on behaviour, having an impact on economic activity through the remainder of this year and into much of next year."

Gold paused its rally, down 0.2% at $1,954.33 an ounce.

Oil prices climbed after a surprise drop in U.S. crude inventories was enough to offset concerns about U.S. fuel demand, though concerns about the record increases in COVID-19 infections kept gains in check.

Brent crude futures <LCOc1> were up 58 cents, or 1.3%, at $43.80 a barrel by 1028 GMT. U.S. West Texas Intermediate crude futures <CLc1> gained 43 cents, or 1.1%, to $41.47.

Investors are also keeping a close eye on the U.S. Federal Reserve as it begins its two-day meeting.

The Fed is expected to sound reassuringly accommodative at its policy review later in the day and perhaps open the door to a higher tolerance for inflation - something dollar bears think could squash real yields and sink the currency even further.

Investors are also focused on U.S. Congress and White House as they clash over new measures to replace enhanced coronavirus unemployment benefits that are due to expire on Friday.

BlueBay's Riley said the market consensus was that a $1 trillion support package will be agreed.

"I think that’s a kind of bare minimum and that won’t be the last that will be needed," he said.

(Reporting by Elizabeth Howcroft; Editing by Nick Macfie and David Goodman)

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