LONDON (Reuters) - European shares dipped on Thursday, edging back further from the 14-month high hit in the previous session, with some saying action from the U.S. Federal Reserve later in the session is needed to provide further support to prices.
The FTSEurofirst 300 was down 0.4 percent at 1,103.83 by 0822 GMT, after gaining 0.1 percent on Wednesday having at one stage hit its highest levels since early July 2011 after a top German court gave the green light for Europe’s new bailout fund.
However, with the European Stability Mechanism ratified, the initial rally which followed the news wore off as investors’ attention shifted to the Fed’s policy decision.
“Markets are probably getting overexcited by all the positive developments, and certainly once some kind of disappointment shows up, they could react with a bit of a short retrenchment because they are to some degree overbought,” Gerhard Schwarz, head of equity strategy at Baader Bank, said.
Joe Rundle, head of trading at ETX Capital, however, said the market will likely continue its recent rally even if the Fed does not act on Thursday, with investors continuing to be reassured by a European Central Bank pledge last week to buy the sovereign bonds of struggling countries that ask for a bailout.
“I don’t think they’re going to deliver QE, but they’re going to hint at it very strongly, keeping it in reserve for when it’s needed further down the line... Momentum is to the upside and the ECB has bought time.”
The odds among economists polled by Reuters on a third round of bond buying from the Fed rose to 65 percent in August from 60 percent previously. Of the 51 who put the chances of QE3 at more than 50 percent, 39 predicted the Fed would act on Thursday following its two-day policy meeting.
Airbus-owner EADS and Britain’s BAE Systems were among the top fallers across Europe as investors weighed up news they are in advanced talks to create an industry giant that would overtake rival Boeing in sales and contend with defence cutbacks in Europe and the United States.
“We believe that in practise the deal would be more about strategic visions than tangible P&L (profit & loss) synergies,” Espirito Santo Investment Bank said in a note.
Espirito Santo pointed out that the French and German governments each hold 22.4 percent of EADS, while the British government has a special share in BAE allowing it to veto any foreign entity from owning 15 percent.
It also said it believes the U.S. Pentagon could hold an effective veto on the tie-up, especially because the main strategic logic of the deal is for EADS to gain access to the U.S. market.
Both were left nursing 5.5 percent share-price drops, in hefty trading volume, with that for EADS at nearly five times its 90-day daily average, and for BAE, at almost three times its 90-day daily average.
Reporting by Tricia Wright; Editing by Toby Chopra