European shares edged higher in thin, choppy trade Wednesday ahead of a meeting of regional leaders to try and resolve the two-year-old euro-zone debt crisis.
Earnings news was patchy, with bumper profits for Norwegian telecom Telenor
Markets had rallied recently as traders bet politicians would reach a deal on the debt crisis, with the FTSEurofirst 300 <.FTEU3> on course to snap a five-month losing streak, albeit from a low base. It is still down 12.3 percent in the year to date.
To move higher, the market needs to see political agreement on a number of contentious issues, including private sector losses on Greek debt and a leveraging of the bailout fund to prevent further contagion to Italy, where short-term borrowing costs hit a three-year high.
If you talk to our Japanese desk, our New York desk, the first thing they ask is, 'What's happening in Europe?'. It's not just European equities waiting for the summit, it's global markets, said Simon Maughan, head of sales at MF Global.
While expectations were extremely low and failure to act at all would see all hell break loose, he said the market would likely rise on sufficiently aggressive incremental steps that allow the market to build a platform at current levels.
Specifically, Maughan said a 60 percent writedown on notional Greek debt is the type of number the market wants to see, but a 40 percent writedown on the net present value would be seen as a negative.
On boosting the firepower of the EFSF, Maughan said while not everyone would be pleased with the exact method, the key thing was boosting it to close to 2 trillion euros. If you talk about a trillion or less, people are going to go, 'No'.
Politicians have been gradually lowering expectations that a comprehensive plan will be forthcoming at the summit, due to start after the close of the market, culminating in the postponement of a finance ministers meet.
Bank of America Merrill Lynch, meanwhile, suggested a tactical relief rally could occur, even though the summit has the potential to disappoint, as many investors are long cash and bearishly positioned.
While there is ample room for disappointment from the summit, sentiment and positioning already reflect a bearish tone. In short, we see scope for a tactical relief rally even if we remain cautious in the long term, they said in a note.
At 11:43 a.m. (British time), the FTSEurofirst 300 was up 0.1 percent at 983.07 points, bouncing between the 50 percent and 61.8 percent Fibonacci retracements of its August 1 to September 23 sell-off, in volume just under a quarter of its 90-day daily average.
At the end of a mixed morning session autos were the leading sector, with French carmaker Renault
Domestic rival Peugeot
Near midday, Peugeot was up 1.3 percent and among the most heavily traded European blue chips, in volume already more than its 90-day daily average after less than half a day's trade.
Telenor was the biggest gainer across all sectors, however, rising 3.7 percent after it joined Nordic peers such as Tele2
LESS THAN UNIFORM
Banks, which are especially sensitive to the outcome of the debt summit due to their large holdings of sovereign debt, were steady, as Nordic lenders provided some earnings support.
Around midday, the STOXX Europe 600 Euro Zone Banks index <.SX7E> was up 0.1 percent, while the broader index <.SX7P> was up 0.2 percent.
Results were mixed, again illustrating the gap between northern and southern European lenders in terms of balance sheet strength, recapitalisation needs and broader outlook.
Among the top gainers was Sweden's Handelsbanken
BBVA fell 1.3 percent after its net profit lagged expectations, hit by a fall in trading revenues.
A weakening in the outlook was evident in Thomson Reuters data showing an increase in the pace of deterioration in European companies' earnings momentum. The data, showing analysts' upgrades minus downgrades as a percentage of total estimates, put the STOXX Europe 600 <.STOXX> companies at -19.8 percent, down from -16.2 percent a month ago.
(Additional reporting by Dominic Lau in London, Alexandre Boksenbaum-Granier and Juliette Rouillon in Paris; Editing by Will Waterman)