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Rates hike on cards as shares drop

European shares closed off their highs yesterday after Federal Reserve Chair Janet Yellen said a rate hike in December was a live possibility, while Germany’s blue-chip index underperformed after a scandal at carmaker Volkswagen widened.

The FTSEurofirst 300 rose 0.46 per cent after earlier gaining as much as 1.1 per cent on the back of a fresh pledge from the European Central Bank to ramp up stimulus if necessary, while Germany’s DAX was down 0.97 per cent.

In comments to Congress that followed the release of strong US services sector data, Yellen said the economy was performing well and that the Fed would still take a gradualist approach to raising rates once the first step is taken.

“What goes on with central banks continues to drive markets,” said Jerome Schupp, head of research at SYZ Asset Management in Geneva, adding that it was difficult to be too optimistic about equities by only looking at the economic fundamentals and the mixed corporate earnings picture.

With 55 per cent of STOXX Europe 600 companies having reported earnings so far this quarter, 49 per cent have beaten or met expectations, with 51 per cent missing forecasts.

Schupp said volatility could resurface in the coming weeks, although monetary stimulus from ECB should help European equities make more gains by year-end. After the close of European equity markets on Tuesday, ECB President Mario Draghi said the degree of monetary stimulus would be reviewed at the bank’s meeting in December and policymakers remained willing and able to act if needed.

Volkswagen fell 9.5 per cent after it said it had understated the fuel consumption of 800,000 cars sold in Europe.

Majority stakeholder Porsche was also down 8 per cent after it warned that VW’s latest findings could weigh further on its results.

“Another week, another shock in the VW story,” analysts at Exane BNP Paribas said in a note. “VW’s latest admission on CO2 will have ramifications across the sector.”

The STOXX 600 Autos and Parts index was top sectoral loser in Europe with a decline of 2.2 per cent. Basic resources stocks gained 1.6 per cent, the top sectoral gainer, on firmer copper prices and comments from Chinese President Xi Jinping that were seen as supportive to the economy.

Top riser was commodities firm Glencore, up 5.3 per cent after saying trading was strong.

It said it was on track to reduce its debt and boost liquidity thanks to asset sales, and plans to deepen copper output cuts to help lift prices.

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