Europe midday: Early gains on trade talk optimism stick, but traders very cautious

European shares are trading near their best levels of the session amid potentially positive signals ahead of the second day of US-China trade talks, although some traders remained of a decidedly cautious bent.

As of 1219 GMT, the pan-European Stoxx 600 index was up by 1.09% or 3.76 points to 346.65, alongside a jump of 1.7% or 69.31 points for the French Cac-40 to 4,788.62, while the FTSE Mibtel was adding 0.72% or 137.52 points to 19,090.79.

In particular, markets were encouraged by Chinese President Xi Jinping's decision to send his top economic advisor, Liu He, to the first round of talks and by news that Chinese importers had carried out their third largest purchase ever of US soybeans.

Despite that, Chris Beauchamp at IG was quite skeptical, telling clients: "the current bounce in equities still looks like one of those vicious bear market rallies, and the worsening eurozone economic outlook, combined with a lack of easing from the ECB, means that stocks in Europe are still facing a very tough future that suggests further falls are likely.

"In the short-term, hopes of progress between the US and China have provided the underpinning for the rally, but given the inability of both sides to agree it makes sense to expect these hopes to be dashed in due course."

On the economics front, according to the German ministry of finance, industrial production slipped by 1.9% month-to-month in November, well below the consensus projection for a 0.3% increase.

The year-over-year rate slipped to -4.7% from a downwardly-revised +0.5% in October. Net revisions to the month-to-month data were -0.3 percentage points.

"This headline is much worse than we expected [...] We now think production fell 1.4% quarter-on-quarter in Q4, only slightly worse than the 1.7% plunge in Q3," said Claus Vistesen at Pantheon Macroeconomics.

"In other words, the German manufacturing sector was in recession in the second half of 2018, reflecting in part the fact that the industry hit capacity constraints earlier in the year and rising global uncertainty amid the trade conflict between the U.S. and China."

In corporate news, Airbus shares found a bid following a Reuters report, citing two persons, that the jet manufacturer had "operationally" hit its target for 800 deliveries.

Morrisons was in the red even as it reported stronger-than-expected retail sales over the festive period. Investors were pleased with the company’s like-for-like sales growth but disappointed by another relatively weak performance form the core retail arm.

Richard Hunter, head of markets at Interactive Investor, said: "The shares have fallen foul of the wider and weaker market environment, having dipped 14% over the last six months, although over the last year the 2.5% decline in the price compares favourably with the FTSE100, which has dropped 11.5% in the corresponding period."

So too was Swiss chemicals group Sika AG after tabling an offer to purchase mortar and construction materials maker Parex Ltd. for an enterprise value of $2.04bn.

Signify remained near the bottom of the pile on the STOXX 600 after a downgrade to 'neutral' from Bank of America-Merrill Lynch. Rotork topped the gainers after the same same broker upgraded the stock.