[LONDON] European shares hit a one-week high on Wednesday before the outcome of a Fed meeting, with banks rallying after a policy overhaul at the Bank of Japan lifted risky assets globally.
The US Federal Reserve is expected to keep rates unchanged after a two-day policy meeting amid tepid inflation and weak economic data, but could signal an increased likelihood of a hike by the end of the year.
The pan-European Stoxx 600 index closed 0.4 per cent firmer after rising to 344.90 points earlier in the session, its highest level since Sept 9, helped by stronger financials.
The European banking index rose 2 per cent, the best one-day per centage gain in a month. Spain's Banco Popular jumped 9.1 per cent after saying it would cut around 300 bank branches as part of a restructuring plan.
Europe took its cue from Asian markets, which welcomed the Bank of Japan's decision to adopt a target for long-term interest rates. Investors also awaited the US Federal Reserve's decision on interest rates, which were expected to be left unchanged.
"Today's policy decision is marginally positive for bank stocks and other risk assets for the short-term as the bank refrained from cutting the short-term rate to a further negative level, but the sustainability of the risk asset rally is questionable," said Tomoya Masanao, head of portfolio management Japan at Pimco.
"The BOJ's policy exhaustion is increasingly clear."
Shares in Natixis and UBI Banca were up 4.1 per cent and 5.4 per cent respectively, while Barclays , up 3.1 per cent, also rose on the back of an upgrade to "buy" from HSBC, which said the sale of the bank's non-core businesses would produce value for shareholders.
JP Morgan's price target upgrade for Dutch bank ING Groep also helped lift the stock 3.2 per cent.
"We remain constructive on Dutch banks, whose valuations at 0.9% discount to the sector don't sufficiently reflect their earnings resilience, in our view," analysts at JP Morgan said in a note.
Among other sectoral gainers, miners were in demand after prices of gold and aluminium rose. Shares in Anglo American, Fresnillo, Rio Tinto and Randgold Resources advanced 1.9 to 3.6 per cent.
Among the fallers, Ocado Group dropped 5.3 per cent after Deutsche Bank cut its rating on the stock to "sell" from "hold", while ADP fell 3 per cent after UBS cut its price target for the stock to 95 euros from 110 euros.