European shares dipped on Tuesday amid concerns over a new coronavirus outbreak originating in China, although positive news on business morale and easing cross-Atlantic trade tensions saw markets ending off session lows.
The increased threat of infection, as millions travel for the Lunar New Year holidays, reminded investors of the economic fallout from the SARS crisis in 2003 that killed nearly 800 people, and led to a recession in Hong Kong.
The pan-European STOXX 600 dropped 0.1%, having fallen up to 1 percent earlier in the session before positive German business sentiment data and trade dialogue between the US and French leaders helped ease some of the losses.
"The reaction in markets suggests that the virus fears aren't necessarily going to be the main story... not enough that good news wouldn't break through and help them reduce losses," said Connor Campbell, analyst at British financial spread better Spreadex.
The STOXX 600 index had touched a record high last week as easing US-China trade tensions and improving economic indicators raised hopes of faster global growth. The shares of long-haul flight operators Air France, Lufthansa and British Airways-owner IAG retreated, as news of the contagion raised concerns over disruptions to travel during a coming Chinese holiday.
China-exposed luxury goods makers including LVMH, Kering, Hermes and Burberry also fell. The basic resources sector, which consists of several heavyweight China-exposed miners, was the worst performing sector for the day.
Offering some relief to investors, French President Emmanuel Macron said he had a "great discussion" with US President Donald Trump over a digital tax planned by Paris and that their two countries would work together to avoid a rise in tariffs.
Also, a survey showed German investors were at their most optimistic since mid-2015, following the US-China trade truce. The reading comes as growth in the EU bloc's largest economy marked its slowest pace since 2013. "Optimism is growing that the bottom is firmly in place for Germany and that an industrial rebound is right around the corner," said Edward Moya, senior market analyst, OANDA, New York.
Swiss drug developer Lonza Group was the top gainer on the STOXX 600 after it said it is seeking a drug industry veteran as its new chief executive. German fashion house Hugo Boss gained 6.8% after reporting a better-than-expected fourth-quarter sales growth.
Markets will now be focusing on the European Central Bank's first policy meeting for the year on Thursday, as well as the euro zone's Purchasing Manager's Index (PMI) data on Friday.
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