Trade woes, HK unrest knock European shares off four-year peak

European shares retreated from four-year highs on Wednesday, as ambiguity over a US-China trade deal and intensifying unrest in Hong Kong kept investors at bay, while Spanish stocks underperformed as Rome braced for more political uncertainty.

The pan-European STOXX 600 index fell 0.2% with trade-sensitive autos and miners hurt as a much awaited speech by US President Donald Trump gave scant clues on the progress of a trade deal with China.

European indices had rallied to their highest levels in four years, just 2% short of reclaiming their record highs, on the prospects of a 'Phase 1' trade deal being finalised between Washington and Beijing and some better-than-expected earnings.

"This suggests that the foundations for market recovery over the past few weeks were not particularly robust," said Will James, senior investment director, European equities, at Aberdeen Standard Investments.

Earnings expectations for European listed companies for the third quarter improved, but not enough for the region to escape the corporate recession it is stuck in, the latest data from Refinitiv showed.

"The underlying question now remains, if the strength in the global economy is good enough for a recovery even if we get some kind of resolution on the trade front," James said.

Banks were the biggest drag on the benchmark index. Those with significant exposure to Hong Kong, such as HSBC and Standard Chartered, weighed as parts of the Asian financial hub were paralysed.

Tullow Oil slumped 21% after cutting its 2019 oil production and free cash flow forecasts and dragged the oil and gas sector down 0.6%.

A 23% jump in the shares of medical equipment maker Ambu

due to an early launch of duodenoscope stood out among positives, while a clear move into defensive stocks like food and beverage and healthcare underlined muted risk appetite.

Spanish stocks led losses among regional peers, down 1.3%, extending a slide after Socialists and far-left Unidas Podemos formed a new coalition on Tuesday.

The unexpectedly fast preliminary agreement was formed between two parties that recently refused to work together.

Ratings agency Fitch said on Wednesday that political stability for the euro zone economy remains uncertain as forming a lasting majority government will be challenging.

Focus will now be on German GDP numbers on Thursday that are expected to show a technical recession for Europe's largest economy, which analysts say is mostly baked in by markets.