European stocks pause ahead of Fed, ECB

Wed Aug 1, 2012 7:32am EDT

* FTSEurofirst 300 up 0.1 pct, Euro STOXX 50 down 0.05 pct

* Low trading volumes ahead of Fed, ECB

* Recent sharp rally vulnerable if ECB disappoints

* Nokia stock surges on Lenovo takeover talk

By Blaise Robinson

PARIS, Aug 1 (Reuters) - European shares were steady around midday on Wednesday as investors waited to see if policymakers would back up pledges to support the euro zone with decisive measures such as buying bonds of troubled countries to lower their borrowing costs.

Shares in Nokia jumped as much as 17 percent in brisk volumes, with traders and analysts citing market talk that Chinese PC maker Lenovo may be interested in the struggling Finnish cellphone maker, before surrendering a big chunk of the gains after a Lenovo official denied the rumour.

At 1100 GMT, the FTSEurofirst 300 index of top European shares was up 0.1 percent at 1,064.40 points in low volumes. The euro zone's blue chip Euro STOXX 50 index was down 0.05 percent at 2,326.30 points, testing for a third day in a row a key resistance level, the 50 percent retracement of the market's slump from mid-March to early June.

"Crossing the level on Monday hasn't triggered an acceleration of the rally. We're getting 'buy' signals on a number of industrial stocks such as Lafarge, but for indexes, the trend is quite 'neutral' at the moment," TradingSat chartist Vincent Ganne said.

"With the past week's violent rally, no one wants to play this market on the downside, yet people are reluctant to take big positions on the upside because of the high level of uncertainties."

Comments by European officials including ECB chief Mario Draghi have raised expectations the bank will announce steps to lower the borrowing costs of indebted Spain and Italy when it meets on Thursday, triggering a sharp recovery rally in stocks.

But Bundesbank head Jens Weidmann poured cold water on hopes for a bold move, saying in an interview given in late June and just published that governments overestimate the central bank's capacities and place too many demands upon it.

Germany also continues to resist giving the euro zone's future ESM rescue fund a banking licence that would allow it to borrow from the ECB to fund government bond purchases.

After Europe closes on Wednesday, the Fed is expected to show it is ready to act as the U.S. economy weakens but should stop short of aggressive measures such as a new round of quantitative easing while keeping the door open for such a move.

The Euro STOXX 50 has jumped nearly 10 percent since Draghi pledged to do whatever it takes to preserve the euro and the index's put/call ratio - a widely-followed measure of investor sentiment - dropped to a one-month low of 0.57 earlier this week, signalling a surge in investors' bullishness.

But the index's strongest three-day rally since late November has left the market relatively vulnerable to a sharp pull-back if the ECB disappoints, some traders said, while the macroeconomic newsflow remains grim.

Data showed on Wednesday the euro zone's manufacturing sector contracted for the 11th straight month in July as output and new orders plummeted, with Germany's manufacturing sector contracting at its fastest pace in more than three years.

The Euro STOXX 50's put/call ratio was back above 1 on Wednesday, according to data from the Eurex exchange, signalling a more cautious tone among investors.

"The ECB might only use the threat of buying bonds if yields rise again, instead of starting to buy them straight away on Thursday afternoon. They could also unveil new liquidity measures to help the banks ... There are a lot of possible scenarios," said Saxo Banque senior sales trader Alexandre Baradez.

"But there is no silver bullet, and the market might have gotten ahead of itself."

Central bank sources have told Reuters that ECB intervention could be at least five weeks away because Draghi's comments had not been agreed in advance with the Governing Council, and other elements must first fall into place.

The sources said the ECB could revive its bond-buying programme in conjunction with the euro zone's rescue funds, but Spain would first have to request assistance, which it has so far resisted.

Euro zone leaders would have to agree to the rescue funds buying up government bonds, and the German Constitutional Court would have to uphold the legality of the bloc's permanent rescue fund in a ruling due on Sept. 12.

Around Europe, the UK's FTSE 100 index was up 0.8 percent, Germany's DAX index down 0.2 percent, and France's CAC 40 up 0.5 percent.

On the earnings front, Schneider Electric gained 3.2 percent after posting a rise in first-half operating profit despite a low-growth business environment, while Standard Chartered surged 5.1 percent after posting forecast-beating results.

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