UKX FTSE 100 Index

By Carla Mozee, MarketWatch

U.K. logs smaller budget deficit

U.K. stocks were modestly higher Wednesday, led by financial shares as investors embraced a Bank of Japan monetary policy shift that should benefit yield-hungry banks.

The FTSE 100 picked up 0.3% to 6,849.80, but pared a heftier rise in part as shares of Royal Bank of Scotland PLC were left out of gains made within the bank space. On Tuesday, the London benchmark rose 0.3% (http://www.marketwatch.com/story/ftse-100-becalmed-as-traders-wait-for-central-banks-2016-09-20) to 6,830.79.

Stocks on Wednesday rose after the BOJ unexpectedly said it would start targeting 10-year interest rates, committing to keep them around zero (http://www.marketwatch.com/story/bank-of-japan-keeps-rates-steady-tweaks-policy-framework-2016-09-21) as part of a new policy framework aimed at bolstering inflation. The central bank said it will maintain quantitative easing until its inflation target of 2% is overshot, and it kept its main interest rates unchanged.

"The market seems to be giving the BOJ a tentative thumbs up," said Richard Perry, market analyst at Hantec Markets, in a note. "However, perhaps it is a bit early to celebrate, as now the market will look forward to tonight's Fed decision."

He pointed out the initial reaction was for the yen to weaken, the Japanese government bond yield curve to steepen and Japanese equities to push higher. Japan's Nikkei (http://www.marketwatch.com/story/asian-markets-mixed-as-investors-await-boj-decision-2016-09-20) rose nearly 2%, and the Topix's banking subsector gained nearly 7%.

The BOJ's monetary policy shift means that yield curve control is now the central bank's focus, Perry noted.

Banks shares top-up: The effort to steepen the yield curve was embraced by buyers of bank stocks, as financial institutions typically borrow on short-term rates and lend money on longer-term and higher rates.

London-listed bank shares advanced, with Barclays PLC (BCS) (BCS) up 3.4%, Lloyds Banking Group PLC (LLOY.LN) (LLOY.LN) rose 2%, and Standard Chartered PLC (STAN.LN) tacked on 0.9%. HSBC PLC (HSBA.LN) (HSBA.LN) picked up 0.7%.

But Royal Bank of Scotland PLC (RBS.LN) (RBS.LN) shares fell 0.9% as Spanish lender Santander (SAN) (SAN) reportedly walked away from talks to buy the majority state-owned bank's Williams & Glyn branches.

Fed ahead: Investors have another key central bank meeting to grapple with later Wednesday. The U.S. Federal Reserve's decision on whether to raise interest rates is due at 7 p.m. London time, or 2 p.m. Eastern Time.

Read:Here's how the Fed's doves and hawks will use the new inflation and sales data (http://www.marketwatch.com/story/fed-hawks-will-leverage-inflation-data-to-get-their-way-doves-will-counter-with-retail-sales-2016-09-16)

Corporates: Diageo PLC (DEO) (DEO) shares edged up 0.1% although the Johnnie Walker whisky maker said the fiscal year has started well (http://www.marketwatch.com/story/diageo-upbeat-expects-to-hit-growth-target-2016-09-21)and that it expects hit its growth target. Diageo shares have been higher over the past four sessions.

Imperial Brands PLC (IMBBY) (IMBBY) shares fell 2% after rising for four straight sessions. Jefferies initiated coverage of the tobacco maker with a buy rating, saying actions the company has undertaken "have positioned it well to deliver EPS growth of mid-single digit over the medium to long term." British American Tobacco PLC (BATS.LN) (BATS.LN) edged up 0.2%, also initiated with a buy rating at Jefferies.

Data: The U.K. government in August spent GBP10.5 billion more on public services than it received in revenue, the Office for National Statistics said Wednesday. That's lower than the deficit of GBP11.5 billion marked in the year-earlier period. But the Office for Budget Responsibility still expects the government will overshoot the watchdog's annual borrowing forecasts (http://www.wsj.com/articles/u-k-s-august-budget-deficit-lower-than-last-year-1474449206).

The pound was buying $1.2999 compared with $1.2988 late Tuesday.

(END) Dow Jones Newswires

September 21, 2016 06:50 ET (10:50 GMT)

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