Euro Markets Close Lower before Fed

European markets ended in the red Tuesday, as investors waited for the outcome of the Federal Reserve's monetary policy decision.

"All we've really seen today is a little bit of unwinding of what we had over the past few days… otherwise not too much going on, in terms of the volumes at least," Geoff Kendrick from Westpac told "European Closing Bell."

Recent bullish economic data has the majority market expecting a quarter-point cut from the Federal Open Market Committee, but there is still a 42 percent chance that the central bank will cut by half a point, according to fed funds futures contracts on the Chicago Board of Trade.

"We tend to feel that, for the most part, the Bernanke Fed has been seen to be a bit more dovish than the market expects," Bear Stearns analysts wrote in a note to Reuters.

"This could mean a 50bp Fed funds cut today although, more likely is a 50bp discount rate cut in our view, which may be a bit more than the consensus anticipates. A 50bp cut in the discount rate may well evoke a positive stock market response."

Other economists stressed economic uncertainties, still running high as the credit crunch failed to ease over the past month.

"It's very difficult to see where we're going and how fast," Rob Carnell, senior economist at ING, told "Worldwide Exchange."

"We've got the same problem with the equity markets, we're in a price discovery mode at the moment," Carnell added.

Money Market Rates Rise

The European Central Bank (ECB) lent 60 billion euros ($88 billion) in three-month funds at an average date of 4.88 percent, the highest since November 2000, in a sign that the tensions in the credit markets continue.

Financial institutions' thirst for liquidity was greater, with 122 banks bidding for more than 105 billion euros worth of financing.

Meanwhile, a measure of German investing morale was at its lowest level in nearly 15 years, based on fears about the health of the U.S. economy and turmoil in financial markets.

The ZEW research institute said its economic sentiment indicator fell to -37.2 this month -- the lowest since January 1993 -- from -32.5 in November.

The strong euro was finally beginning to take its toll even on high-quality German products, economists said.

"Expectations have worsened this month and this will, together with a strong euro, of course, reduce the chance German exporters have to bring their products abroad," Matthias Kohler, researcher at ZEW, told "Worldwide Exchange."

"At the moment it seems that the economic situation in six months will be worse than right now, but I think it's wrong at this moment to talk about a recession," Kohler added.

Corporate Bright Spots

Shares of Cadbury Schweppes dropped 2.1 percent despite the fact that it expected its candy sales growth in 2007 to be above its target range and also expected to see modest margin improvement for the year.

The maker of Dairy Milk also reiterated its plans to de-merge its U.S. beverage business by the second quarter of 2008.

Shares in Xstrata ended near the top of the FTSE-100 index with a 2.5 percent gain after the Financial Times reported the miner is open to talks with potential suitors.

"I think we're going to see more gains being made in Xstrata," John Meyer, head of research at Fairfax, told "European Closing Bell."

"It's backed by Glencore…they've been very smart traders over the years," Meyer added.

He said the soft metals' prices are likely to soften but emerging markets, like China, India and Brazil, will continue to lead fast growth in demand. Mergers and acquisitions in the mining sector will continue, Meyer predicted.

"We see a new acquisition every few days in the sector," he said.

Zurich's SMI index was slightly lower after the Wall Street Journal reported that Swiss drug maker Novartis' restructuring plan involves job cuts and management reshuffling. Shares of Novartis lost 0.6 percent.

But Swiss Re jumped 2.4 percent after the company said it remained "committed" to its financial services unit, which was the source of a large subprime writedown the previous month and that it would likely speed up its stock buyback program. Shares trimmed earlier gains at the close, finishing 0.4 percent up.