European stocks drop amid US shutdown, before ECB

European stock markets mostly fell and the euro dipped against the dollar on Wednesday with sentiment hit by the US government shutdown, as dealers awaited the ECB's latest rate decision. London's FTSE 100 index fell 0.76 percent to stand at 6,448.95 points in midday deals, as supermarket group Tesco topped the fallers board after Britain's biggest retailer revealed that first-half profits slumped by a third. The CAC 40 in Paris reversed 0.70 percent to 4,167.38 points and Frankfurt's DAX 30 dipped 0.49 percent to 8,646.40. "European markets refused to show much sign of optimism today as investors pondered the next outcome of the continuing battle between the US President and Congress," said Spreadex trader Shavaz Dhalla. On the upside, Italy's FTSE Mib index rallied by almost one percent on easing concerns over the political situation in Italy, with the third-biggest economy in the eurozone. Europe's main indices had risen on Tuesday on hopes of a settlement to Italy's political crisis, despite the dramatic US government shutdown. Later on Wednesday, at 1145 GMT, the European Central Bank is forecast to hold interest rates but indicate that it is keeping a close eye on eurozone liquidity conditions. "The main focus is likely to be on liquidity and the impact on interest rates," noted Barclays analyst Fabio Fois. "Despite the ongoing recovery in economic activity, the ECB believes that risks remain skewed to the downside." The euro dipped to $1.3521 from $1.3527 late in New York on Tuesday. The dollar fell to 97.41 yen from 97.94 yen Tuesday. On the London Bullion Market, the price of gold declined to $1,277.15 an ounce, compared with $1,290.75 on Tuesday. In Asia, stock markets mostly closed higher on Wednesday following a positive lead from Wall Street, with investors betting that US lawmakers will quickly reach a deal to end the shutdown. However, traders are nervous as Republicans and Democrats -- already gridlocked over a budget bill -- have just over two weeks to strike a separate deal on raising the country's debt ceiling and avoiding a painful default. A day after the US government shut down for the first time for 17 years, lawmakers remain at loggerheads over the budget, with Democrats refusing to give in to Republican demands for cuts in President Barack Obama's flagship health law. However, investors for now seem unruffled by the crisis, which has seen about 800,000 federal workers sent home and several agencies closed or on skeleton staffing. "Despite the ongoing uncertainty as a result of the US shutdown, most global markets remain sanguine about the economic impact," said Rebecca O'Keeffe, head of investment at online stockbroker Interactive Investor. "However, if the impasse remains unresolved over the coming days, the pressure on investors and markets will increase markedly." In company news, Britain's biggest retailer Tesco saw its share price slide after announcing that net profits tumbled 33.6 percent to £820 million ($1.3 billion, 981 million euros) in its first half, or 26 weeks to August 24. That compared with profits after tax of £1.24 billion in the same period a year earlier. Earnings were hit by flat revenues, restructuring costs, tough overseas markets and lower profit from property sales. Tesco also agreed a major deal on Wednesday to create a retail giant in China, as it seeks to offset "challenging" trading conditions in Europe which hit profits hard. Tesco will combine its Chinese operations with those of China Resources Enterprise (CRE), it said, confirming plans first revealed in August.