Europe open: Stocks push higher after BoJ; Fed in focus

European stocks pushed higher in early trade 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 0845 BST, the benchmark Stoxx Europe 600 index was up 1.1%, 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 2.5%.

Meanwhile, oil prices were in the black. West Texas Intermediate was up 0.3% to $43.33 a barrel while Brent crude was 1.8% higher at $46.69.

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.

Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor, said: “European markets are following Asia higher - with banks and financial companies leading the charge after the Bank of Japan surprised the market. With the market divided on whether the Bank of Japan would increase stimulus or cut rates further, Governor Kuroda decided to think outside the box and scrapped their set monetary base goal with the intent of targeting yields of various maturities, thereby creating a steeper yield curve.

“The shape of the yield curve has, in the past, been a very clear predictor of future economic activity. A flat yield curve gives no incentive for banks to lend, and typically presages an imminent economic slowdown. A steeper yield curve provides the motivation for banks to encourage customers to borrow, and is typically associated with a strengthening economy. Given that financial companies borrow short and lend long, today's announcement by the Bank of Japan has provided the rocket fuel for Japanese banks to rally strongly. The major question is how effective this policy will be.”

In corporate news, Zara owner Inditex nudged higher as its first-half profit beat expectations, while Zurich Insurance was also firmer after announcing plans to merge its corporate and commercial units.

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, to expand and upgrade the City Centre Ajman mall in the United Arab Emirates.

Smirnoff, Guinness and Baileys producer Diageo was a little weaker after saying it is set to deliver a “stronger” performance for the 2017 financial year.