EUROPE MARKETS: European Stocks Cling To Gain As ECB Wait Begins

By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- Europe's benchmark stock index inched ahead in a choppy session on Wednesday, but failed to follow through on its biggest rally in eight months, as investors weighed weak data out of the U.S. and focused on an upcoming European Central Bank meeting.

The Stoxx Europe 600 index inched up 0.1% to 337.68, after jumping 2.1% on Tuesday. The move was the largest one-day percentage gain since early July, triggered by easing tensions between Russia and Ukraine after Russian troops were called back to their bases and President Vladimir Putin stressed he wouldn't use military force just now.

Among major movers in Wednesday's trade, shares of Subsea 7 SA dropped 7% after the offshore-engineering firm said earnings per share fell more than 40% in the fourth quarter.

Shares of Melrose Industries PLC dropped more than 8% after the investment company reported a rise in full-year adjusted pretax profit, but says it faces headwinds from the current strength of the pound.

On a more upbeat note, shares of Carrefour SA advanced 4.3% after the French supermarkets giant said operating profit grew 5.4% last year.

Euro-zone economic data and the ECB

More broadly, investors focused on fresh data on the euro zone. Eurostat, the statistical office of the European Union, said retail sales in January jumped a better-than-expected 1.6% in the currency union compared with December, fueled by a solid increase in the nonfood sector. A second estimate on GDP growth confirmed the euro-zone economy expanded by 0.3% in the fourth quarter.

Additionally, the purchasing managers index for the euro bloc showed its economy grew faster than estimated in February, sending the composite PMI to the highest level since June 2011.

The data will be something for the ECB to consider when it meets on Thursday. Some analysts say the central bank could ease policy given the fact inflation in the region has been steadily falling.

"The main focus at tomorrow's ECB Governing Council meeting will be on the staff's updated economic forecasts, and in particular whether inflation is likely to remain below target in 2016, thus potentially creating room for further monetary policy action in the coming months," said Tom Rogers, senior economic adviser to the EY Eurozone Forecast.

The real question, he said, is whether the ECB will tolerate an "ongoing risk of deflation" in the periphery where they expect sluggish prices in places such as Greece, Spain and Portugal. He said it's likely the ECB will continue to underline the fact it has easing options, but hold off using them unless the recovery takes a turn for the worse.

In the U.K., the Markit/CIPS services PMI for February came in at 58.2, exceeding analyst expectations, but slipping from the 58.3 recorded in January.

In the afternoon, the U.S. ADP jobs report showed that private-sector hiring remains weak, hurt by weather, ahead of Friday's bigger nonfarm payroll data. The Institute for Supply Management's non-manufacturing index expanded at a sharply slower pace than expected. Wall Street was trading flat in early action.

Among country-specific indexes in Europe, the U.K.'s FTSE 100 index lost 0.5% to 6,790.45, while Germany's DAX 30 index fell 0.2% to 9,570.23. France's CAC 40 index was flat at 4,399.80.

Ukraine-Russia standoff

Investors also watched for developments in the Ukraine-Russia standoff, with Nato and Russia expected to discuss the latest developments at a special meeting on Wednesday. Nato said on Tuesday it continued to support a peaceful solution to the crisis, but that Russia is violating "Ukraine's sovereignty and territorial integrity."

Analysts at UBS said markets shouldn't underestimate what's at stake and that the "risk premia in financial assets certainly do not seem excessive." The situation is a "bad advertisement" for emerging markets at a sensitive time, they said, and the consequence could be redemption pressures on emerging-market bond funds.

"If the situation in Ukraine fails to de-escalate, we believe flow pressure on EM funds could impact markets such as Hungary, South Africa and Turkey, which have minimal economic linkages with Russia and Ukraine," they said.

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