UK equities mark weekly declines, eyes on next PM

By Johann M Cherian and Bansari Mayur Kamdar

(Reuters) -UK stocks closed higher on Friday but fears around surging inflation, a looming recession and the policy direction under a new prime minister set to be announced on Monday drove weekly losses for the main indexes.

The blue-chip FTSE 100 rose 1.9% but suffered its worst weekly showing since June 24 with losses of nearly 2%.

The domestically focussed midcap index gained 1.9% to snap a nine-day losing run, which was its worst since the height of a pandemic-induced selloff in 2020. It posted a 1.7% weekly loss.

Polls put Foreign Secretary Liz Truss ahead in the race to become Britain's new leader. She has based her campaign on promises to slash taxes but is yet to detail how she will tackle soaring energy bills. Some economists say her plans will stoke already-high inflation and force the Bank of England to raise interest rates even faster.

"The sheer scale of the energy bills that are likely to hit next year suggests that this (tax cuts) will need to be coupled (or replaced) with additional direct payments to households across the income spectrum," ING economist James Smith said.

"Liz Truss has already made clear her intention to hold an emergency budget in the first two weeks. Any further guidance on potential timelines will be closely watched by markets, particularly on the fiscal front," said Deutsche Bank's Sanjay Raja.

UK equities, along with European stock markets, have suffered sharp losses in the recent days on concerns that a halt in Russian gas supplies to Europe will exacerbate inflationary pressure already running in double digits.

However, signs of easing wage pressures in the United States boosted sentiment on Wall Street and European markets on Friday. [.N]

Shell Plc advanced 2.2% after the oil major and Exxon Mobil confirmed the sale of their California oil joint-venture Aera to German asset manager IKAV for $4 billion.

Peer BP rose 2.8%, tracking firm crude prices on bets that OPEC+ will discuss output cuts at a meeting on Sept. 5. [O/R]

UK housebuilders tumbled after HSBC warned that the country is on the cusp of a housing downturn, as a steep climb in mortgage rates casts a cloud over demand.

The sectoral index dropped 1.4% to its lowest since 2013.

(Additional reporting by Aniruddha Ghosh and Sruthi Shankar in Bengaluru; Editing by Krishna Chandra Eluri and Chizu Nomiyama)