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European stocks drop as investors gauge Fed policy

Frankfurt - European stocks fell, heading for their longest run without gains in two months, as investors assessed the possibility of a Federal Reserve rate increase this year.

Linde dragged chemical shares to the biggest decline on the Stoxx Europe 600 Index, dropping 4.3% after Citigroup said that a potential tie-up with Praxair would face tough regulatory hurdles. ASML Holding fell 4.7% after Intel said it won’t use the semiconductor-equipment maker’s lithography technology to make its 10-nanometer chips.

ABN Amro rose 3.8% after posting better-than-estimated second-quarter profit. Energy producers fell as crude retreated.

The Stoxx 600 slipped 0.2% to 342.71 at 11:55, heading for a fourth day without gains. Stocks fell in thin trading on Tuesday as a stronger euro weighed on exporters and investors assessed hawkish comments from New York Fed President William Dudley, who warned that they are underestimating the likelihood of increases in borrowing costs. The volume of Stoxx 600 shares traded today was 28% lower than the 30-day average.

“A pull-back is following through in European stocks today after the Fed raised the possibility of a September rate hike - it seems like expectations had become too muted,” said William Hobbs, the head of investment strategy at the wealth-management unit of Barclays Plc in London.

“There’s some profit taking setting in as commodities, with oil in particular, softening a little bit, so that’s helping take the edge off. It’s a sleepy market as well; we’re waiting for some sort of direction one way or the other.”

Atlanta Fed chief Dennis Lockhart backed up Dudley’s stance, saying he’s confident growth is accelerating enough for at least one hike in 2016. St. Louis Fed chief James Bullard speaks today and the minutes of the US central bank’s last policy meeting are scheduled for release at 20:00.

Traders are pricing in even odds of a rate increase by December. As recently as Monday, February was the earliest they saw at least a 50% chance of a hike.

Investors are evaluating a recent rally that helped European shares erase their post-Brexit losses and propelled UK and German benchmarks into bull markets. Confidence that central banks will continue to support growth, and some better-than-forecast corporate results drove a rebound after a slump following Britain’s vote to leave the European Union.

Still, the Stoxx 600 is struggling to stay above its 200-day moving average, a level that has proved a hurdle after past rallies. The benchmark is down 6.3% for the year.

Among other stocks moving on corporate news today, Carlsberg slid 5.7% after the Danish brewer reported first-half profit that missed analysts’ estimates as the weakness of Russia’s ruble eroded earnings. Admiral tumbled 8.3%, the most since June 24, after reporting a decline in its solvency ratio.

Wienerberger retreated 6.3% after the world’s biggest maker of bricks said it’s had to cut production of clay products in the UK as demand slowed in the run up to the Brexit referendum.

Delta Lloyd gained 4.7% after the Dutch insurer returned to profit in the first half as it cut costs and changed the way it values liabilities.

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