European shares head lower as Fed nerves kick in

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European stocks reversed early gains on Wednesday, as investors turned cautious ahead of the U.S. Federal Reserve’s first economic projections since the COVID-19 pandemic set off a recession in February.

After gaining as much as 0.9% at the open, the pan-European STOXX 600 was last down 0.5%.

Travel & leisure sector led the declines with a 2.2% fall, while automakers, oil & gas and bank stocks  – all outperformers in recent weeks – fell between 1.3% and 2%.

While no major policy announcements are expected when the Fed wraps up its meeting later in the day, investors will scrutinize its remarks on the health of the U.S. economy, particularly after the surprise recovery in May jobs data.

The central bank’s projections are expected to signal a collapse in output this year and near-zero interest rates for the next few years.

“European markets are on the back foot once again despite early gains, with traders fearing that the recent recovery in stocks could see (Fed Chair Jerome) Powell take his foot off the gas,” Joshua Mahony, senior market analyst at IG wrote in a client note.

The continent’s markets have seen a broad recovery in recent weeks, with investors moving into cheap, growth-sensitive stocks such as those of banks and oil companies on hopes that the worst fallout from the health crisis is over.

However, the banking index fell 1.3% despite an early boost from a Reuters report that European Central Bank officials were drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans.

Hitting travel stocks, Lufthansa shares slid 5.9% as the German government planned to extend its travel warning to countries outside Europe until Aug. 31.

“All these stocks have had a huge run lately, and there’s a bit of profit taking,” said Michael Baker, an analyst at ETX Capital.

Continental fell 4.0% after a media report cited the German automotive supplier’s CEO as saying it must save hundreds of millions of euros in costs and will probably have to lay off workers due to a slump in demand caused by the pandemic.

Inditex shares gave up early losses to trade 1.6% higher after the Zara owner said in-store sales and customer activity had returned to pre-coronavirus levels in some Asian countries.

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