European shares slightly up ahead of Fed, BMW races higher

Wed Mar 19, 2014 8:11am EDT

* FTSEurofirst 300 index gains 0.25 percent

* Focus on Federal Reserve meeting, forward guidance

* BMW surges on profit outlook, boosts auto sector

By Atul Prakash

LONDON, March 19 (Reuters) - European shares edged higher in cautious trading ahead of an expected announcement of a further cut in U.S. monetary stimulus on Wednesday, with BMW leading auto stocks higher after delivering a bullish profit outlook.

The STOXX Europe 600 Automobile and Auto-parts index climbed 1.6 percent, the top sectoral gainer in Europe, helped by a 7.3 percent jump in BMW shares after the owner of the Mini, Rolls-Royce and BMW brands said it expected record car sales and a rise in pretax profit in 2014.

A rally in automobile stocks helped European shares to post slight gains, despite continuing nervousness over the situation in Crimea. The pan-European FTSEurofirst 300 index was up 0.25 percent at 1,309.4 points by 1208 GMT, extending gains in the previous two sessions.

However, investors avoided stronger bets ahead of the Fed meeting. Analysts said a further cut in the Fed's monthly bond purchases by $5 billion was largely factored in, but the market would look for hints about the speed of future cuts and whether the central bank provides new qualitative guidance on when it might eventually raise interest rates.

"There is always some nervousness ahead of the Fed meeting. We expect the tapering process to continue and there is likely to be some guidance around the unemployment rate and future U.S. rate rises, although we still don't expect the first rate hike until July 2015," Barclays Wealth strategist Henk Potts said.

"The Fed continues to signal that the economy is in a better shape, the recovery is ongoing and they are slowly going to withdraw the stimulus from the system. Investors read that as a long-term positive, rather than the short-term fears about what the slow withdrawal of stimulus will mean for the markets."

An improving global economic outlook, and the U.S. central bank's move to inject liquidity in the market by buying bonds, had helped European stocks to record an impressive gain of 16 percent last year and pushed the FTSEurofirst 300 to a 5-1/2-year high this year, but the Fed support is waning.

"It's still going to be a big announcement," said Lorne Baring, managing director of B Capital Wealth Management.

"We expect no change in the policy in terms of action, but there might be hints about the speed of the withdrawal of monetary stimulus. The markets will move based on the language."

This year's stocks rally has been hit by geopolitical tensions over Ukraine and signs of a slowdown in Chinese economic growth. The FTSEurofirst 300 fell 5.5 percent in one week from early March before recovering some lost ground.

European stocks witnessed a relief rally in the previous session after Russian President Vladimir Putin signed a treaty making Crimea part of Russia but said he did not plan to seize any other regions of Ukraine.

However, the situation remained fragile as Russian troops and unarmed men stormed Ukraine's naval headquarters in the Crimean port of Sevastopol. Ukraine's acting Defence Minister Ihor Tenyukh said his country's forces would not withdraw from Crimea, raising concerns of an armed conflict.

Among sharp movers, global clothing group Inditex rose 3.8 percent after saying its early 2014 sales rose after low profit growth last year due to depreciating currencies outside the euro zone and the cost of refurbishing flagship stores.

On the other hand, British engineer Smiths Group dropped 5.9 percent, the biggest faller on the pan-European index. Its first-half profit fell 3 percent due to pricing pressure in its second largest unit and a strong pound.

Europe bourses in 2014: link.reuters.com/pad95v

Asset performance in 2014: link.reuters.com/rav46v

Today's European research round-up (Editing by Mark Trevelyan)

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