European stocks climbed to a 10-week high on Wednesday led by banks ahead of an update on US tax reform, while Alstom shares surged after its rail merger with Siemens.

The pan-European STOXX 600 gained 0.3 per cent to hit its highest level since July 20, while euro zone stocks rose 0.4 per cent. Britain's FTSE was up 0.3 per cent.

Tax reform plans

Banks hit a six-week high, up 1.3 per cent, as the prospect of fiscal stimulus in the US resurfaced, with all eyes on US President Trump's update on tax reform plans expected after European trading hours.

But analysts were sceptical of the level of detail which would emerge. “We're not holding our breath on today's tax plan prompting markets to seriously reprice US reflation prospects,” said ING analysts.

The cyclical sectors which had surged on the market's "Trumpflation” expectations were nonetheless top gainers on the day, with basic resources stocks also higher.

A weaker euro also supported indexes which had dipped this summer as the strong currency dented earnings expectations.

Merger and acquisition news stole the spotlight with Alstom shares hitting their highest level in more than six years after the French industrial group struck a deal to merge rail operations with Germany's Siemens.

Alstom pared early gains to rise 4.6 per cent, while Siemens led gains on the DAX, up 2 per cent.

Analysts combed through the fine print of the deal, saying it made strategic sense in a consolidating rail industry globally with competition heating up, but pointing to potential problems in cost-cutting plans.

“Siemens-Alstom targets annual synergies of 470 million euros after four years, which looks overly ambitious,” said Deutsche Bank analysts, adding politicians in France and Germany were likely to resist layoffs.

Spain's Banco Sabadell and Caixabank , which had suffered as tensions over the Catalan referendum simmered, recovered, were up 5 and 3 per cent respectively, after the government said police would take control of voting booths in Catalonia to thwart it.

Broker downgrades drove the worst performers. Swedish retailer ICA sank 4.9 per cent after SEB cut it to "sell", and Electrolux fell 3 per cent after Goldman Sachs cut it from its pan-European “buy” list.

Overall, second-quarter earnings for the STOXX 600 were expected to grow 16.4 percent compared to the same period last year, the latest Thomson Reuters data showed.

The strengthening euro had led analysts to cut earnings expectations for Europe, but Goldman Sachs' head of European equities Sharon Bell still expected earnings to grow 15 per cent in 2017, making it the best year since 2010.

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