To taper or not to taper? Europe volatile ahead of FOMC outcome

European stocks inched higher early Wednesday, tracking gains in Asian bourses ahead of the Federal Reserve`s final policy decision of the year.

Will the US central bank begin tapering its $85 billion asset purchases or not? Market Participants have been pondering for an answer to that question that is too close to call at this Federal Open Market Committee, while sentiment continues to be cautious with investors mostly holding grounds before the Fed`s policy outcome as anticipation runs high!

As of 04:33 a.m. EST, the  Stoxx Europe 600  added 0.70% to 313.48, rebounding from yesterday’s slide as all ten groups on the benchmark gains, led by shares of health care, consumer goods and technology, respectively.

- Britain`s  FTSE 100  was 0.31% at 6,506.02

- France`s  CAC 40  was up 0.44% at 4,086.44

- Germany`s  DAX 30  was up 0.64% at 9,142.90

- Italy`s  FTSE MIB  was up 0.80% at 18,067.90

Equities advanced on the board, but moves in the FX market were still kind of tight. The S&P futures signaled to Wall Street opening up slightly higher later having slumped yesterday. In Asia, equities rose for a second day, led by a rally in Japanese stocks.

On the economic front, the German-based Ifo institute released December surveys showing that German business confidence rose for a second month, adding to signs the recovery is adding steam in Europe’s largest economy.

The Ifo business climate index rose to 109.5 this month from 109.3 in November, in line with analysts’ median forecast.

German confidence data comes on the heels of news politicians elected Chancellor Angela Merkel to a third term as the leader of Europe’s biggest economy, nearly after three months after an awkward election result forced her to put together a new governing coalition.

Ms. Merkel won 462 votes to 150 with nine abstentions. Now she leads “grand coalition” of Germany’s biggest parties – her conservative Union bloc and the center-left Social Democrats.

In the UK, jobs data continue to impress with the ILO unemployment rate falling further to four-an-a-half-year low in October, to 7.4% from 7.6%, beating average forecast calling for no change. The jobless claims also fell in November to -36.7 thousand from revised -42.8 thousand, beating -35.0 thousand expected as well.

The Bank of England’s Monetary Policy Committee said in its minutes of its December 4-5 meeting that Britain’s economic recovery may be at risk if the sterling strengthens much further – a its first significant hint of concern about the British currency’s recent rise.

The nine-member policy panel was unanimous on voting to keep the benchmark interest steady at 0.5% and to leave the bank’s 375 billion pound size of asset purchases unchanged.

The European calendar sounded quite busy today but the consensus major concern remains the US central Bank’s looming policy decision, as expectations run high for an early slash in size of the bank’s most controversial bond buying program.

The Fed`s repeated rounds of quantitative easing (QE) have fueled stocks gains to the point where some economists say prices may not longer be reasonable, but the longer QE continues, the more dramatic equities could fall once the end of stimulus is in sight.

Although some analysts believe stimulus tapering is just around the corner amid fresh fears the assets bubble might get out of control, most participants are now well into 2014, with some as far as June, thus little news is expected out of this meeting when it ends Wednesday.

However, there could be a chance to watch changes to policy guidance which could twist expectations as much as a possible reduction in asset purchases, so stay tuned equity junkies!