European shares tread water before Fed stimulus cut

Last Updated: Wed, Sep 18, 2013 15:20 hrs

* FTSEurofirst 300 up 0.2 percent, within sight of 5-year high

* Stays within range ahead of expected cut to Fed's stimulus programme

* Guidance key to avoid volatility spike - BNP Paribas IP

By Francesco Canepa

LONDON, Sept 18 (Reuters) - European shares hovered near five-year highs on Wednesday, staying within their weekly range as investors held fire ahead of an expected first cut to the Federal Reserve's equity-friendly stimulus programme.

The pan-European FTSEurofirst 300 was up 0.2 percent at 1,255.32 by 1452 GMT, hovering a touch below a five-year high of 1,262.25 points hit on Monday and well within its 1 percent range for the week.

Shares slightly trimmed gains in late trade as Republicans in the U.S. House of Representatives said they would demand the delay of a health insurance reform if they are to agree to an increase of the government debt limit, which is needed to avoid default.

Investors were reluctant to make large directional bets on indexes before a Fed announcement scheduled for 1800 GMT, when the bank is expected to unveil a $10 billion cut to its $85 billion monthly asset purchases, which have helped the FTSEurofirst to rise around 15 percent in the past year.

With a small reduction to the programme now seen as priced in, any indication about the pace of future reductions to the programme was likely to set the market's tone for the coming months.

"If you make it too data-dependent you ... are just fuelling volatility (in asset prices)," William de Vijlder, chief investment officer for strategy and partners at BNP-Paribas Investment Partners, said.

"If you set a timeframe ... to roll back the programme so that it stops at a certain date, the market would price that instantaneously and you would not create any volatility."

De Vijlder saw equities as being in a sweet spot at a time when the global economy showed signs of recovery and the gradual reduction in the Fed's programme hurts demand for bonds.

Equity investors remained calm in the run-up to the Fed's announcement, with the Euro STOXX 50 volatility index, which measures the cost of insuring against future swings in euro zone blue-chip stocks, up by just 0.2 percent and close to a recent one-month low.

In a further sign of investors' sanguine view on shares, demand for put options on the Euro STOXX 50, used by managers to protect their portfolios against potential falls, has been fading before September derivative contracts expire on Friday.

Atif Latif, director at Guardian Stockbrokers, said only a cut to stimulus of $15 billion or more would be negative for the market in the short term.

"A cyclical recovery remains on track and ... even with a move lower (for equities) this continues to provide an attractive entry point," he said.

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