By Sujata Rao
LONDON, Oct 30 (Reuters) - World shares slipped off 21-month highs on Wednesday as the prospect of a U.S. interest rate cut was offset by reports a Sino-U.S. trade deal may be delayed, but a possible $50 billion merger between Fiat-Chrysler and PSA capped European losses.
Sentiment has also been dented by weak earnings from a swathe of companies ranging from European banking giant Deutsche to tech titan Google, and by renewed uncertainty in Britain, which is set to hold a parliamentary election on Dec. 12.
After falls of around 0.5% on Asian bourses MIAPJ0000PUS, .N225, .CSI300, European shares opened softer, with a pan-European equity benchmark .STOXX down 0.2%.
The market was supported by the auto index .SXAP which rose 0.7% after news that carmakers were in talks for a merger that would create one of the world's biggest companies. Fiat Chrysler FCHA.MI and French PSA PEUP.PA shares jumped 7-8%
But broader sentiment was undermined after Reuters quoted a U.S. official as saying an interim trade agreement between Washington and Beijing might not be completed in time for signing next month.
That weighed heavily on trade-sensitive tech .SX8P and commodity shares .SXPP in Europe, and MSCI's world equity index .MIWD00000PUS edged down after five successive sessions in the black.
Michael Hewson, chief market strategist at CMC Markets, said the deal news had not sharply lifted shares because regulatory hurdles remain, not least the French government's stake in PSA.
"We've seen a lot of companies exploring M&A and I struggle to understand why this deal in particular is any more probable than the one with Renault," he said, said referring to Fiat's failed attempt to acquire another French carmaker.
Some caution has also crept in before the U.S. Federal Reserve announcement at 1800 GMT. Fed funds rate futures 0#FF: price a 25 basis-point cut on Wednesday but markets are fixated on what message the central bank will send, and December rate cut expectations have ebbed in recent days.
"The Fed could be quite hawkish in terms of 'this is it' and send a message markets don't really want to hear. They are pricing the Fed on a full-blown cutting path and that may not be what the fed wants to convey," Hewson said, noting still-robust U.S. growth and booming stock markets.
But futures signalled a weaker session for New York, after the S&P500 hit a record high .SPX. It had been boosted by strong earnings from drug manufacturers Merck MRK.N and Pfizer PFE.N but closed lower after the trade deal report.
TREPIDATION OVER SNAP ELECTION IN BRITAIN
Adding to that was a disappointing report from Google parent Alphabet GOOGL.O which pushed the tech-heavy Nasdaq Composite .IXIC 0.6% lower. On the European earnings front, Deutsche Bank DBKGn.DE fell more than 6% after reporting a loss for the second consecutive quarter.
Germany's Volkswagen VOWG_p.DE provided a reminder of slowing global demand, cutting its 2019 sales outlook, . Its shares slipped 0.7%.
Investors have abandoned some of their safe-haven bets in recent weeks and piled into equities since U.S. President Donald Trump outlined what he called the first phase of a trade deal with China and expectations grew the U.S. Federal Reserve would cut rates by 0.25 percentage point again this month.
That has taken world stocks almost 3% higher this month while expectations of more U.S. rate cuts after this month have faded, lifting U.S. Treasury yields to six-week highs while German yields are set for their biggest monthly rise since Jan 2018 US10YT=RR, DE10YT=RR.
Two-year U.S. bond yields are around 1.65% US2YT=RR, rising off two-year lows of 1.368% in early-October while 10-year yields stood at 1.833% US10YT=RR, up 20 bps this month.
But the rally has stalled amid the uncertain outlook for trade, economic growth and company profits while optimism over Britain averting a no-deal exit from the European Union has been replaced by trepidation over the calling of a snap election.
If no party wins conclusively the future of Brexit will be up in the air again, with options including Britain leaving the EU without agreement with Brussels, or another referendum being held that could scupper the divorce.
Those developments have pulled sterling 1.2% lower in the past week against the dollar. On Wednesday it traded modestly firmer around $1.29 and versus the euro it edged up to 86.3 pence GBP=D3, EURGBP=D3.
The dollar was steady against other major currencies .DXY before the Fed meeting and an advance reading of third-quarter economic growth which could shed light on the rate outlook.
Against the yen, the greenback was little moved at 108.86 yen JPY= just off a three-month high.
"If the market is going to price in the end of the current rate-cut cycle, the dollar/yen could climb above 110 yen," said Tohru Sasaki, head of Japan markets research at JPMorgan Chase Bank. "On the other hand, if the market is going to price in two more cuts after this month's expected cut, the pair could fall to mid-107 yen level."
(Reporting by Sujata Rao; additional reporting by Hideyuki Sano in Tokyo, Editing by Timothy Heritage)
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