By Elizabeth Howcroft
LONDON (Reuters) - European shares rose on Wednesday, as initial dismay at U.S. President Donald Trump's decision to cancel fiscal stimulus negotiations with lawmakers in Washington was replaced by optimism about an aid package after the U.S. elections.
Trump broke off talks with Democrats in a tweet, saying that negotiations will stop until after the Nov. 3 election, when he promised a major stimulus bill if he wins.
The news quickly rattled Wall Street but Asian investors became less concerned overnight on the grounds that whoever wins the election will still introduce a fiscal stimulus bill.
Asian stocks hit two-week highs and European shares, which opened slightly in the red, quickly rose, helped by upbeat earnings reports.
The STOXX 600 was up 0.2% on the day by 0757 GMT and London's FTSE 100 was up 0.1%.
MSCI world equity index, which tracks shares in 49 countries and had climbed to a three-week high before the stimulus talks were cancelled, was up 0.1%.
U.S. stocks were also set to rebound when Wall Street opens, with S&P 500 futures up 0.6%, helped by later tweets by Trump where he called for more fiscal support.
"Even if a pre-election deal cannot be reached, Biden’s widening lead in the election polls is making it likelier that more substantial stimulus can eventually be agreed on," UBS strategists wrote in a note to clients.
"Indications of a more decisive election result may also reduce investors' concerns about a protracted and contested outcome," they added.
A poll on Monday showed Democrat Joe Biden with his widest lead in a month, as a majority of Americans said Trump could have avoided coronavirus.
Deutsche Bank (DE:DBKGn) strategists also wrote that markets were instead focusing on the prospect of more fiscal stimulus in the case of a clean sweep Democratic victory.
"Further evidence that this election will result in a definitive result will offset any short term stimulus disappointment," wrote Deutsche Bank strategist Jim Reid.
Trump's tweets came shortly after U.S. Federal Reserve Chair Jerome Powell reiterated warnings about the economic recovery, saying that the U.S. economy could slip into a downward spiral if the coronavirus is not controlled and growth sustained.
German industrial output fell unexpectedly in August, indicating that the recovery from the coronavirus recession in Europe's largest economy could be less powerful than hoped.
The dollar - which initially rose when the talks in Washington were cancelled - fell as European markets opened on Wednesday, down 0.1% against a basket of currencies at 93.705 at 0736 GMT.
Minutes from the Fed's September meeting will be published at 1800 GMT.
Euro-dollar was up 0.2% at $1.1756, while the Australian dollar, a liquid proxy for risk, was up 0.5% against the U.S. dollar.
The Australian government pledged billions in tax cuts and measures to boost jobs on Tuesday, but traders say that the Aussie faces downside risks as the Reserve Bank of Australia is expected to cut rates in November.
The pound was up 0.4% at $1.2919.
Brussels is gearing up to extend Brexit negotiations until at least mid-November to avoid a no-deal scenario when Britain's status-quo transition period with the European Union ends on Dec. 31, sources said.
Oil prices extended their decline. With West Texas Intermediate crude oil futures down 48 cents at $40.18 a barrel by 0748 GMT.
Gold was up 0.7% at 0748 GMT, at $1,890.91 per ounce.
The benchmark 10-year Bund yield was down by about 1 basis point at 0.516%.
Graphic: Stocks versus COVID - https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjbdyyvr/Pasted%20image%201601984809410.png
