By Ankika Biswas and Bansari Mayur Kamdar
(Reuters) -Europe's benchmark index rose on Wednesday, led by healthcare and retail stocks, with investors bracing for a policy decision by the Federal Reserve later in the day. The pan-European STOXX 600 closed 0.7% higher and logged its third straight day of gains. Trade volumes were lighter due to an All Saints' Day observance.
The index registered its worst monthly performance in over a year in October, hurt by concerns about economic growth and interest rates staying higher for longer.
Capping gains in equities, however, was a rise in euro zone bond yields ahead of the Fed's policy outcome at 1800 GMT, where it is widely expected to hold U.S. interest rates steady.
"There is always some nervousness ahead of an FOMC meeting, given that there is always the potential for a surprise," said Stuart Cole, chief macro economist, Equiti Capital.
Data on Tuesday which showed inflation in the euro zone fell fast and the economy began to contract - the dual impact of ECB's steady rate hikes - also remained in focus.
"The market is taking comfort from falling CPI and the suggestion this has for rates in the euro zone is to have peaked. The poor GDP figures also suggest that the ECB will be reluctant to tighten policy any further," Cole added.
ECB Vice-President Luis de Guindos welcomed the fall in inflation, particularly in underlying measures, but policymaker Joachim Nagel noted the need to keep rates sufficiently high for long.
Retail stocks, rose 1.7% and led sectoral gains, boosted by a 3.6% advance in Britain's Next on raising its full-year profit outlook for the fourth time in six months.
Healthcare stocks also climbed 1.1%, with heavyweight Novo Nordisk (NYSE:NVO) rising 1.6% ahead of its results on Nov 2.
Belgian pharmaceutical firm Argenx climbed 4.5%, extending previous session's rally.
Barry Callebaut was the top STOXX 600 gainer, up 4.9% after posting full-year results in line with expectations and updated medium- to long-term targets based on its new strategy.
Meanwhile, Denmark's Orsted (CSE:ORSTED) slumped 25.7% to the bottom of the STOXX 600 following a bigger-than-expected third-quarter loss after it took a $4 billion impairment charge and decided to abandon two U.S. wind projects.
Swedish builder Skanska dropped 12.4% after reporting third-quarter operating earnings well below expectations.
Of the STOXX 600 that have reported earnings to date, 57.6% beat analyst estimates, LSEG data showed on Tuesday.