By Sudip Kar-Gupta
LONDON - European shares fell on Tuesday as investors turned cautious in the run-up to a European Central Bank (ECB) meeting, with the Swiss market lagging after figures showed an unexpected contraction in the country's economy.
The FTSEurofirst 300 index fell 0.3 percent to 1,088.20 points, while the euro zone's Euro STOXX 50 index was flat.
Expectations the ECB will firm up a debt-buying scheme to fight the euro zone's debt crisis have driven an equity rally since late July.
The FTSEurofirst 300 has risen some 7 percent since ECB head Mario Draghi pledged on July 26 to do “whatever it takes” to protect the euro from the crisis, which risks increasingly impacting on Spain and Italy.
But uncertainty over the timing and extent of any ECB action following the central bank's meeting on Thursday has limited gains and, some traders believe, left the market vulnerable to a sell-off.
“I'm still expecting further weakness unless they provide a 'shock-and-awe' statement on Thursday, but I don't think that they themselves necessarily know how to fix the crisis,” said Adrian Slack, head of equities at Bastion Capital.
Credit rating agency Moody's also changed its outlook on the “Aaa” rating of the European Union to negative and warned it could downgrade the EU, putting more pressure on the ECB to act.
Swiss stocks fall
Switzerland's benchmark SMI equity index was the worst-performing major European stock market, falling 0.6 percent after the country's unexpected economic contraction.
Blue-chip Swiss stocks were among the biggest drags on the FTSEurofirst 300 index, with chemicals group Roche and food group Nestle falling 1 percent and 0.5 percent respectively.
British telecoms heavyweight Vodafone also fell, shedding 1.4 percent and taking the most points off the FTSEurofirst 300 after brokerage Bernstein cut its rating to “market perform” from “outperform”.
AFS Brokers equity analyst Christopher Ho expected European stock markets to continue to trade in narrow ranges ahead of the ECB meeting.
Societe Generale analysts wrote in a research note that, although they expected European policymakers to be able to prevent a break-up of the euro zone, it would take a long time for investor confidence to recover fully.
“We see glimmers of light at the end of the tunnel, but the road back to confidence will be a long one with many twists and turns,” wrote SocGen. - Reuters