Europe close: Stocks pare gains ahead of Fed as US markets drop

European stocks had trimmed gains by the close of play on Wednesday after a negative start on Wall Street, with investors turning cautious ahead of a key policy decision by the Federal Reserve.

Underwhelming results from US blue chips Microsoft and Alphabet have put a dampener on market sentiment after tech stocks were responsible for much of Wall Street's gains so far this year. The tech-heavy Nasdaq was trading down 1.5% in morning trade in New York.

This side of the Pond, the pan-European Stoxx 600 Index finished the session more or less flat, coming off its highs in the final hours of trade, with gains in Madrid and Milan offset by falls in London, Paris and Frankfurt.

Both the CAC 40 and DAX indices closed at record highs on Tuesday, so there was likely some element of profit taking behind today's losses for French and German stocks.

An interest rate decision from the Fed is expected after European markets close, and while the central bank is expected to stand pat on rates, investors will be watching chair Jerome Powell closely for any clarity on the monetary policy outlook. Market expectations of a cut in March have been pushed back over the past month following resilient economic data for December and January.

“Today’s Fed decision is eagerly awaited by investors who are desperate to see what the Fed will hint at regarding the first rate cut," said Chris Beauchamp, analyst at IG. "Much of the ebullient risk appetite we have seen over the past three months has been built on the expectation that the Fed will cut several times this year. Given how heavy the selling in Alphabet has been it looks like markets could get quite ugly if the Fed strikes a hawkish tone.”

Europe data comes in mixed

Market chatter around rate cuts was also doing the rounds in Europe on Wednesday after data showed that German inflation continued to ease in January as energy prices fell sharply. According to provisional figures from Destatis, the Federal Statistical Office, the consumer price index was 2.9% in January, the lowest since June 2021, when it was 2.4%. Analysts had been forecasting CPI of 3.0%.

The figures came ahead of Thursday's inflation data for the wider eurozone. Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: "On the face of it is, this is a dovish set of numbers [...] Overall, we need to see Thursday’s eurozone inflation data before revising or reiterating our call for an European Central Bank rate cut in March."

In other news, retail sales in Germany unexpectedly declined 1.6% in December, surprising economists who had pencilled in a rebound of 0.7% following a 2.5% decline in November. Meanwhile unemployment in Europe's largest economy held steady at 5.8% in January. While it remains the highest since June 2021, the rate was narrowly below forecasts for 5.9%.

Market movers

Novo Nordisk shares gained 4% after the Danish company beat earnings expectations amid soaring demand for weight loss drug Wegovy and diabetes drug Ozempic.

H&M meanwhile plunged 12% as it made a surprise announcement of a new CEO and missed an operating profit forecast.

Shares in Swiss pharmaceutical firm Novartis fell 3% despite the company reporting 10% growth in net sales and 18% higher core operating income. However, core net income missed expectations.

Croda shares gained 5% in London on a readacross after US peer Ashland guided for higher sales in the second quarter, driven by healthy demand.