European shares steady ahead of Fed rate decision

By Amruta Khandekar and Bansari Mayur Kamdar

(Reuters) -European shares were subdued on Wednesday after hitting near one-week highs in the previous session, as investors treaded cautiously ahead of the U.S. Federal Reserve's imminent interest rate decision.

The region-wide STOXX 600 was flat by close.

The index had rallied more than 1% on Tuesday after softer-than-expected U.S. inflation data raised hopes of the Fed shifting to smaller rate hikes.

"There's a tension between inflation coming down and the ongoing questions around economic growth and the prospects for a recession in developed economies next year," said Richard Flax, chief investment officer at Moneyfarm.

The Fed is widely expected to deliver a 50 basis-points (bps) rate increase at 1400 ET (1900 GMT) on Wednesday, after four back-to-back 75 bps hikes. However, concerns about the future trajectory of rate hikes kept optimism in check, as investors worried about the prospects of the economy being tipped into a recession from sharp interest rate hikes.[.N]

British inflation fell more than expected in November, offering further evidence of easing price pressure after euro zone inflation also slowed last month.

Both the Bank of England and the European Central Bank will announce interest rate decisions on Thursday.

"Yesterday's CPI raised markets expectations of an easier (Fed) hiking cycle and that sort of influenced European markets, because it affects market perceptions of how quickly the ECB could go and how far their hiking cycle would take them," said Bas van Geffen, senior macro strategist at Rabobank.

The European Central Bank expects inflation to remain above its 2% target for the next three years, a source told Reuters, more than markets currently expect and signalling its fight against runaway prices is far from over.

Euro zone borrowing costs rose amid hawkish remarks from European Central Bank sources, while investors were cashing in on a bond rally the day before fueled by U.S. inflation data.

Rate-sensitive technology stocks declined 0.9%, while banks fell 0.5%.

Defensive stocks such as Nestle and Unilever (NYSE:UL) added 1% each, capping losses on STOXX 600.

Travel and leisure stocks fell 1.4%, dragged lower by London-listed shares of TUI, which fell 8.0% after the world's largest holiday firm said it planned to repay COVID-19 support through a capital raise next year.

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Meanwhile, Zara owner Inditex (BME:ITX) rose 3.1% after the world's biggest fashion retailer posted a 24% increase in net profit for the first nine months of its fiscal year.