The FTSE 100 outperformed its European peers on Thursday supported by gains in engineering stocks that helped offset weakness in miners.
The FTSE 100 closed up 56.32 points, or 0.5%, at 10,572.24. The FTSE 250 finished up 253.44 points, or 1.1%, at 23,715.83, and the AIM All-Share rose 0.44 points, or 0.1%, to 766.18.
Sterling faded at the close after previously hitting its highest level in a year against the dollar amid growing expectations that Home Secretary Shabana Mahmood will become chancellor under the incoming government led by Andy Burnham.
Mahmood has become the favorite to replace Rachel Reeves at the Treasury when Burnham is expected to enter Downing Street on Monday, after weeks of speculation over her cabinet appointments.
Energy Secretary Ed Miliband had previously been seen as the leading candidate for the job, but is viewed less favorably by financial markets amid concerns he would be less fiscally disciplined.
Meanwhile, the International Monetary Fund is urging the incoming Burnham government to avoid increasing public spending in the face of pressures such as rising household energy bills.
The pound was trading at $1.3483 on Thursday afternoon, little changed from $1.3486 on Wednesday. It had previously traded as high as 1.3558.
Against the euro, sterling fell to 1.1784 euros from 1.1791 on Wednesday.
Sterling had risen sharply on Wednesday as early reports began to emerge that Mahmood could get the keys to 11 Downing Street.
Kathleen Brooks, head of research at XTB, said the pound's positive reaction tells us two things about the Burnham government.
“Firstly, the market is confident that Mahmood will take a sensible approach to economic policy and tackle the difficult issues of social spending. Secondly, Burnham is keen to have people on the right of the Labor Party in key economic positions in her cabinet,” he said.
Investors also weighed figures showing the UK economy returned to modest growth in May, although the recovery remained muted as the conflict in Iran continued to weigh on activity through higher prices and supply chain disruption.
According to the Office for National Statistics, gross domestic product rose 0.1% in May after contracting 0.1% in April, matching market expectations. A 0.3% expansion in the services sector offset falls of 0.5% in production and 0.8% in construction.
During the three months to May, GDP grew by 0.7%, declining slightly from an upwardly revised increase of 0.8% in the three months to April.
Deutsche Bank UK chief economist Sanjay Raja expects momentum to weaken somewhat as the year progresses.
Iran's energy squeeze will eventually reach households and businesses, limiting spending and investment,” while persistent geopolitical uncertainty around the Strait of Hormuz “won't help either,” he said.
In European stock markets on Thursday, the CAC 40 in Paris closed down 0.1%, while the DAX 40 in Frankfurt fell 0.3%.
In New York, the Dow Jones Industrial Average rose 0.3%, the S&P 500 fell 0.1% and the Nasdaq Composite fell 0.7%.
Taiwanese chipmaker TSMC fell 2.7% in New York as trading began, even as it issued positive guidance and announced that net profit soared more than 77% to an all-time high in the second quarter thanks to massive demand for AI hardware.
“All of this makes you wonder what American tech corporations will have to come up with to excite investors again,” said market analyst David Morrison of Trade Nation.
“This is important as earnings season will accelerate over the next fortnight,” he added.
Netflix will report after New York markets close on Thursday, while Google parent Alphabet and Tesla will release results next week.
Amazon, Apple, Meta and Microsoft are among the companies publishing results next week.
The 10-year U.S. Treasury yield traded at 4.57% on Thursday, compared with 4.56% on Wednesday, and the 30-year U.S. Treasury yield widened to 5.10% from 5.08%.
Diploma led the FTSE 100's gains, rising 6.3% after raising its full-year forecasts for the third time in five months following what it described as a “very strong” third quarter.
The company now expects organic revenue growth of 14%, up from previous guidance of 12%, while operating margin is forecast at around 26.5%, up from 25% previously.
Elsewhere, the acquisition frenzy on UK stock markets continued with Rotork and Gooch & Housego among those to accept bid proposals.
Rotork soared 67% after agreeing a £4.14 billion all-cash takeover by Swiss engineering group ABB.
Somerset-based photonic components and systems maker Gooch & Housego rose 39% as it accepted a £345.6 million bid from Maryland-based buyout fund Arlington Capital Partners VII.
The biggest risers on the FTSE 100 were Diploma, which rose 425.0p to 7,195.0p, Metlen Energy & Metals, which rose 2.2p to 43.6p, Spirax, which rose 280.0p to 6,930.0p. 2,504.0p.
The biggest falls on the FTSE 100 were St James's Place, down 94.0p to 1,110.0p, Antofagasta, down 154.0p to 3,588.0p. 4.1p at 172.0p.
Contributed by Alliance News
