European shares edge up but investors cautious ahead of Fed meeting

2/2 © Reuters. FILE PHOTO: Security guard wearing a face mask walks past the Bund Financial Bull statue on The Bund in Shanghai 2/2

LONDON (Reuters) - European shares edged up slightly on Wednesday after mixed earnings reports, but a resurgence of COVID-19 cases kept investors cautious while they waited to hear from the U.S. Federal Reserve.

Wall Street closed lower on Tuesday and the negative sentiment continued through the Asian session, with Japan’s Nikkei falling on a rising yen and weak start to the earnings season.

But the MSCI world equity index (MIWD00000PUS), which tracks shares in 49 countries, was up around 0.1% and mixed corporate earnings saw MSCI's main European Index rise around 0.3% at 0757 GMT <.MSER>.

"Global stock markets appear to be starting to get a little wobbly as the latest earnings numbers start to paint a picture of a global economy that could start to face a challenging time in the weeks and months ahead," wrote Michael Hewson, chief market analyst at CMC Markets UK.

"The resurgence of coronavirus cases that are starting to get reported across the world is prompting the realisation that hopes of a V-shaped recovery are starting to look like pie in the sky," he added.

Deaths from coronavirus in the United States had their biggest one-day increase since May on Tuesday, with this month's spike in infections having forced some states to make a U-turn on reopening their economies.

Hong Kong leader Carrie Lam warned that the city was on the brink of a large-scale outbreak and tightened lockdown measures.

Japan expects the economy to contract this year, with a return to growth next year, four government sources told Reuters.

Global airlines cut their coronavirus recovery forecasts on Tuesday, saying it would take until 2024 - a year longer than previously expected - for passenger traffic to return to pre-crisis levels.

London's Heathrow called on the government to urgently introduce a passenger testing regime, warning that the country risked losing a game of global "quarantine roulette".

The dollar index, which steadied overnight, continued falling in early London trading, hitting fresh two-year lows (=USD).

As sentiment soured, high-grade euro zone bond yields dropped to their lowest in more than two months, with the German 10-year yield at -0.511% (DE10YT=RR).

The euro, which rallied last week when European Union leaders agreed on a massive EU-wide recovery fund, climbed 0.4% to $1.1762 (EUR=EBS).

Gold, which rallied to an all-time high of $1,980.57 on Tuesday, slipped to $1956.3200 .

Oil prices climbed after a surprise drop in U.S. crude inventories was enough to offset concerns about U.S. fuel demand amid record increases in COVID-19 infections in some states.

Brent crude futures (LCOc1) were up 29 cents, or 0.7%, at $43.51 a barrel by 0756 GMT. U.S. West Texas Intermediate crude futures (CLc1) gained 24 cents, or 0.6%, to $41.28 a barrel.

Investors are focused on the U.S. Federal Reserve, as it begins its two-day meeting.

The Fed is expected to sound reassuringly accommodative at its policy review later in the day and perhaps open the door to a higher tolerance for inflation - something dollar bears think could squash real yields and sink the currency even further.

Sentiment is also dampened by the U.S. Congress and White House struggling to agree on a new deal to replace enhanced coronavirus unemployment benefits, which are due to expire on Friday.