Defence, oil stocks lift London's FTSE 100 amid Russia, Fed worries

By Bansari Mayur Kamdar

(Reuters) -Defence and energy stocks led a recovery in UK's blue-chip FTSE 100 from near three-week lows on Wednesday, while investors also braced for likely interest hikes from the U.S. Federal Reserve and the Bank of England.

The benchmark FTSE 100 rose 0.6%, while the domestically focussed mid-cap index added 1.0%.

Oil majors BP and Shell climbed after Russian President Vladimir Putin announced a partial military mobilisation, raising the prospect of higher crude prices for longer on tighter supply concerns. Oil prices jumped before giving up gains on dollar strength. [O/R]

Britain's biggest defence company BAE Systems jumped 4.3%, tracking its European peers, after Putin's remarks.

"Investors will be looking at defence stocks and thinking about the potential that governments will look to increase their spend on weapons and on military hardware," said Danni Hewson, financial analyst at AJ Bell.

Also benefiting internationally focussed firms was a dip in sterling to its lowest against the U.S. dollar since 1985 following Putin's move.

Housing stocks rose 3.2% after a report said that newly appointed Prime Minister Liz Truss will announce plans to cut the stamp duty on property tax in the government's mini-budget this week.

Nevertheless, worries of a global economic slowdown lingered ahead of an expected 75-basis-point interest rate hike by the Fed at 1800 GMT.

Financial markets expect the BoE to follow suit on Thursday, pricing in a 91% chance of a 75 bps increase in rates to 2.5%. [IRPR]

"Markets are not quite sure what to expect from the BoE because you've got the UK Government about to borrow a huge chunk of additional cash, the expectation that the economy is already in recession and a situation where the BoE cannot cut rates," said Hewson.

Banks, which usually rise in a high interest rate environment, lost 1.5% in the run up to the meeting.

(Reporting by Bansari Mayur Kamdar and Susan Mathew in Bengaluru; Editing by Sherry Jacob-Phillips, Savio D'Souza, William Maclean)