EUROPE MARKETS: European Stocks Pare Losses On U.S. Budget Hopes

By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets trimmed earlier sharp losses in afternoon action on Wednesday, helped by talks that the U.S. is closing in on a budget deal, in a move that could avoid another government shutdown next year.

Equities traded with sharp losses earlier in the day after better-than-expected U.S. labor data added to fears that the Federal Reserve could soon start tapering its asset purchases, but a worse-than-expected reading on the services sector helped to calmed those jitters.

The Stoxx Europe 600 index dropped 0.6% to close at 317.24, marking a fourth straight day of losses.

Among notable movers, shares of Sage Group PLC rallied 7.3% after the software firm raised its dividend by 6% and said it is on track to meet its organic revenue-growth target in 2015.

Banks posted losses after European Union regulators fined a group of eight financial institutions a record-breaking penalty of 1.71 billion euros ($2.32 billion) for interest-rate fixing. Among fined banks, Deutsche Bank AG (DB) lost 1% and Société Générale SA fell 1%.

Shares of Standard Chartered PLC slid 6.5% in London after the bank said difficult market conditions are expected the rest of the year and that income for 2013 will be broadly flat on 2012.

Taper fears

More broadly, investors were hesitant of buying new stocks, fearing the U.S. Federal Reserve soon will begin to reduce its $85-billion-a-month asset purchases. The ADP job report showed on Wednesday that private-sector employers added a stronger-than-expected 215,000 jobs to the economy in November, further fueling speculation whether the Fed will start tapering already at its December meeting. The data came ahead of the highly anticipated nonfarm-payrolls report on Friday, expected to show 180,000 new jobs were added to the economy in November.

"The main issue for the market remains the job report on Friday and there are fears we might get a strong reading, but I'm not so worried about that. The job report has to be extremely strong to get the Fed to move in December. I think it has to be at least 250,000 before it'll do something," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

"Once the markets see the figures are in line [with expectations], they should go higher...We still have lower interest rates and it's way too early to go negative," he added.

Markets started paring losses in afternoon action on Wednesday after the Institute for Supply Management services' index unexpectedly fell in November, with investors hoping it will weaken the Fed's tapering argument. Meanwhile, a Bloomberg report said U.S. budget negotiators were nearing a deal, which could prevent another government shutdown. U.S. stocks traded higher on Wall Street after opening in mildly lower territory.

Europe events

Events in Europe also had the potential to be market moving later in the week. On Thursday, the European Central Bank and the Bank of England announce their latest monetary-policy decisions, with market participants particularly paying attention to the former for clues on tools to stave off low inflation.

Data out on Wednesday showed retail sales weakened 0.2% in October in the euro zone, while economic growth in the region was confirmed at 0.1% in the third quarter.

Germany's DAX 30 index dropped 0.9% to 9,140.63, even as Deutsche Bank lifted its 2014 year-end target for the benchmark to 11,000 from a previous forecast of 9,700, implying a 20% upside from Wednesday's closing price.

The U.K.'s FTSE 100 index gave up 0.3% to 6,509.97 and France's CAC 40 index lost 0.6% to 4,148.52.

Shares of Tesco PLC fell 0.5% in London after the supermarkets chain said it is performing in line with market expectations, but that same-store sales declined in the U.K. in the third quarter.

Reckitt Benckiser Group PLC slipped 1% after UBS cut the consumer-products firm to sell from buy. The analysts said they see low earnings growth until 2015.

Peugeot SA gained 5.3% in Paris after Goldman Sachs added the car maker to its conviction buy list.

Also in France, Accor SA climbed 3.1% after UBS lifted the hotel operator to buy from neutral.

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