Europe midday: Banking stocks lead the charge after BoJ move; Fed eyed

European stocks rose, with banks leading the charge after the Bank of Japan stood pat on rates but tweaked its policy framework, as investors looked ahead to a policy announcement from the Federal Reserve.

At midday, the benchmark Stoxx Europe 600 index was up 1%, Germany’s DAX was 1.2% stronger and France’s CAC 40 was 1.3% firmer. Banking stocks were among the best performers, with the Stoxx 600 sub-index for the sector up 2.3%.

Meanwhile, oil prices were in the black after data from the American Petroleum Institute on Tuesday showed a 7.5m barrel draw to 507.2m in US crude inventories in the latest week. Analysts had been expecting inventories to increase by 2.3m barrels. West Texas Intermediate was up 0.3% to $43.44 a barrel while Brent crude was 2% higher at $46.78.

The Bank of Japan kept its negative interest rate of -0.1% and its quantitative easing programme at Y80trn a year. However, it set a new target for longer-term interest rates as part of its fight against deflation, as it moved away from policies focusing on expansion of the monetary base towards influencing the shape of the government bond yield.

Following a comprehensive review of its policies, the Bank of Japan decided it would aim to keep the yield on the benchmark 10-year debt issued by Tokyo at about 0%, as it continued to aim at lifting consumer price inflation back up to the 2.0% monetary policy target.

In addition, it said its target for repurchasing Y80trn in government bonds per year would now be flexible and would be allowed to fluctuate in the short-term as a result of policymakers' new focus on bond yields.

As far as the Fed is concerned, analysts are expecting US interest rates to remain on hold, with a hike in December now seen as the more likely outcome.

Atif Latif, director of trading at Guardian Stockbrokers, said: “The majority of economists expect the FOMC to keep rates on hold today. According to Bloomberg, only four of the 102 economists surveyed expect a twenty-five basis point hike while the overwhelming majority see no change. Financial markets are also pricing in a relatively low probability of a hike today with Fed-Fund futures implying a 15% chance.

“If rates are kept on hold today, investors will be watching closely for any clues regarding a December hike. The FOMC does like to telegraph its policy moves to investors and they have long asserted that financial markets should not be caught by surprise when they do raise rates. Therefore, if the FOMC shares the current market view that rates will likely rise in December, they may well offer some clues in today’s announcement.”

In corporate news, Zara owner Inditex nudged lower despite reporting better-than-expected first-half profit, while Zurich Insurance was firmer after announcing plans to merge its corporate and commercial units.

Banco Santander rallied amid reports it has abandoned talks to buy Royal Bank of Scotland’s Williams & Glyn branches.

Saga was in the black after its first-half profits were short of management's full year target but the interim dividend was upped by almost a quarter to compensate.

Interserve was up after announcing that its construction joint venture Khansaheb has been awarded an £81m contract by Middle East developer Majid Al Futtaim.

Drinks maker Diageo reversed earlier losses to trade a little higher after saying it is set to deliver a “stronger” performance for the 2017 financial year.