European shares hit two-month low on Fed jitters

Investors lowered their exposure to riskier assets after a provisional budget deal in Washington this week eased some of the fiscal drag on US economy

European shares slipped to a two-month low on Thursday, tracking losses on Wall Street and in Asia as markets positioned for data that could determine if the US Federal Reserve starts trimming its stimulus next week.

Investors lowered their exposure to riskier assets after a provisional budget deal in Washington this week eased some of the fiscal drag on the US economy.

That raised chances that the bond buying operations that have helped equities to multi-year highs this year could be cut at the Fed's December 17-18 policy meeting.

"We think there is a chance that Fed tapering will begin next week. However, whether it is December, January or March is less important than the fact that the Fed feels able to make a start on withdrawing QE," said Tim Gregory, chief investment officer at Psigma Investment Management, referring to the programme known as quantitative easing.

"Recent GDP data, ISM manufacturing data and the jobs report all lend support to tapering sooner rather than later."

Thursday's data focus will be on US weekly jobless claims numbers for the week ended December 7 and U.S. retail sales data for November.

"This is the final piece of the jigsaw ahead of the Fed meeting and could make the difference when it comes to the decision on tapering," Alpari analyst Craig Erlam said.

A secondary note of caution was added after a source said ex-Bank of Israel governor Stanley Fischer had been asked to be the Fed's next vice chair. Fischer is seen as less dovish than Janet Yellen, the nominee to lead the U.S. bank.

The pan-European FTSEurofirst 300 was down 0.3 percent at 1,252.55 points by 0914 GMT after falling as far as 1,249.84, the lowest since mid-October. The index has fallen about 5 percent after climbing to a five-year high last month, but is still up more than 10 percent so far this year.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.8 percent on Thursday and U.S. shares earlier closed 0.8 to 1.4 percent lower.

EURO BUOYANT

In the bond market, Bund futures fell 12 ticks to 140.18, with German 10-year yields 1 basis point up at 1.84 percent in a market increasingly jittery ahead of the Fed's meeting next week.

Italian and Spanish bonds fell after a media report said the European Central Bank could make euro zone banks hold capital against sovereign bonds to stop weak lenders from using its cash to buy up debt from crisis-hit countries.

In the currency market, the euro hovered near a two-year high against the dollar and a five-year peak against the yen, underpinned by higher short-term market rates which has seen yield differentials move in its favour.

Among commodities, Brent futures held steady above $109 a barrel, while Gold inched up as some safe-haven bids emerged after equities dropped.