European shares ended higher yesterday, with oil stocks such as BP tracking crude's rise to a one-month high, while Britain's biggest supermarket group Tesco gained 3.5 per cent after topping the most optimistic profit estimates.
Gainers included Deutsche Bank, up 1.7 per cent, while BNP Paribas advanced 1.0 per cent after top US investment banks Goldman Sachs and Lehman Brothers reported higher-than-expected quarterly profits.
The FTSE Eurotop 300 index of pan-European blue chips closed 0.5 per cent higher at 1,002.8 points. The narrower DJ Euro Stoxx 50 index also put on 0.5 per cent at 2,790.7 points.
The FTSE Eurotop has risen about seven per cent from 2004 lows hit in August and is up nearly five per cent on the year.
Strategists expect the market to remain in a tight range, while some are spotting bargains in technology stocks.
"We feel that markets are not trading outstandingly cheap on a valuations basis," said Rita Dhut, a European equities fund manager at Morley Fund Management, which is overweight on pharmaceuticals and utilities.
Defensive stocks such as utilities, where earnings and dividends are usually predictable if not spectacular, have been big market outperformers this year.
Morley has been adding exposure in software and business support service stocks such as French computer consultancy firm Cap Gemini and caterer Sodexho.
Around Europe, London's FTSE 100 hit a new 26-month high with gains of 0.6 per cent. Paris's CAC-40 was up 0.7 per cent, and Frankfurt's DAX rose 0.34 per cent.
Tesco was Europe's top blue-chip gainer as booming sales of clothing, DVDs and stationery helped it smash expectations for first-half profits.
"This set of results is truly astounding, and we are provisionally looking to increase our forecasts for the current year by around three per cent at the earnings-per-share level," analysts at Dresdner Kleinwort Wasserstein said in a note.
"This should warrant another leg of outperformance following the very solid bounce in the stock over the past six weeks."
The US Federal Reserve is widely expected to raise interest rates 25 basis points later yesterday, but participants are looking beyond the rate hike.
"With a 25bp rate hike totally discounted today it will be the Fed's statement that provides the lead to the market," said David Brown, chief European economist at Bear Stearns.
"Recent speculation has centred on whether the Fed could 'soften' the language as a precursor to a pause in Fed tightening, possibly as early as the November meeting. We do not believe that there will be a meaningful pause."
The Dow Jones industrial average was up 0.13 per cent, while the technology-laced Nasdaq Composite Index advanced 0.3 per cent.
Strategists said any sign that the Fed could mark a pause in its rate rise cycle would help boost equities.
Higher interest rates push up the borrowing costs of companies and cap consumer spending.