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By Sudip Kar-Gupta
LONDON (Reuters) - Britain's top equity index surged on Friday, after appetite for stocks globally was boosted by unexpected monetary stimulus in Japan, while Royal Bank of Scotland outperformed after posting higher profits.
The blue-chip FTSE 100 index (FTSE) was up by 1.1 percent at 6,534.07 points by the middle of the trading session - adding to a winning run over the last three days and extending a rebound up off 15-month lows earlier in October.
Royal Bank of Scotland, which is 80-percent owned by the British government after it had to be rescued during the financial crisis of 2007-2009, rose by 4 percent to make it the best-performing FTSE stock in percentage terms.
Even though RBS set aside 400 million pounds ($640.2 million) to cover potential fines for manipulating currency markets, traders chose to focus more on a rise in profits that beat market forecasts.
"RBS is rising after it revealed a third consecutive quarterly profit, and its core capital ratio is improving," said IG market analyst David Madden.
However, among stocks underperforming the broader market rally was fashion retailer Supergroup (L:SGP), which slumped 8.7 percent after it became the latest British retailer to issue a profit warning.
The FTSE's advance tracked a rally in stock markets around the world after the Bank of Japan said it would accelerate purchases of Japanese government bonds as part of a massive stimulus package to boost growth and inflation.
Traders said the Japanese move, coupled with expectations of interest rates remaining at record low levels in Britain, United States and Europe for the near-term, would have the effect of continuing to drive investors over to equities for the better returns on offer from the stock market.
"I would expect interest rates will remain lower for longer. People will be searching for yield and that will underpin the equity markets through their dividend yield," said Novum Securities technical strategist Adrian Slack.
According to Thomson Reuters StarMine data, the FTSE 100 has a current dividend yield of 5.4 percent - offering a better return than a yield of around 2.2 percent on 10-year British government bonds (GB10YT=RR).
The FTSE 100 hit a peak of 6,904.86 points at the start of September, its highest since early 2000, but then slumped to 15-month lows in October as weak European economic data knocked back stock markets.
The index remains down by around 3 percent since the start of 2014, but Slack expected the FTSE to challenge the earlier peak levels of September by the end of 2014.
(1 US dollar = 0.6248 British pound)
(Additional reporting by Alistair Smout; Editing by Alison Williams)