Britain's FTSE 100 index closed 1.2 percent higher on Thursday as oil shares ran ahead after an unexpectedly steep drop in US crude stockpiles, and banks gained after a reassuring trading statement from HSBC.
Insurer Royal & Sun Alliance was a FTSE frontrunner, rising 3.5 percent to 117-1/2 pence on talk that it might be the latest UK company to be snapped up in a recent wave of bids for British assets. Traders could give no specifics of potential bidders, but the shares were active last month on talk French rival Axa has the company in its sights.
"There's talk about who the next UK bid target is going to be, and RSA has been mentioned. We haven't had a big bid for a while, and people are thinking there's more to come," said one trader.
The FTSE 100 closed 62.9 points higher at 5,486.1, grabbing back most of Wednesday's 68-point fall, which had been triggered by fears that strong US economic data would translate into a tougher US stance on interest rates.
Merger and acquisition activity jumped back onto the UK agenda early on Thursday after insurer Prudential offered to buy out the minority of shares it does not already own in online bank Egg. Shares in midcap stock Egg, which Prudential floated five years ago and has failed to sell, closed up 14 percent.
Lawrence Peterman, investment director at brokerage Eden, said he was bullish for the UK market, especially since billions of pounds were likely to flood back into shares following the recent take-overs of firms such as telecoms group O2 and logistics company Exel.
"There are lots of deals out there and one or two that we don't know about, and the market will kick on again. My main reason I'm bullish on the UK market is the weight of money coming back in," said Peterman.
Midcap share gains were a little more restrained, but the FTSE Midcap 250 index closed 0.9 percent higher at 8,400.6, the latest in its recent run of record high closings.
US stocks jumped on Thursday after US economic data signalled inflation might be under control and after a hike in European interest rates, which may draw more investment to the United States.
"It's a bit of a mixed bag. We took fright yesterday, because those figures suggested the economy was growing a bit too strongly. People want to see the economy OK but not too strong for fear of interest rates having to be hiked a lot more," said a trader.
Oil shares accounted for about a third of the FTSE's gain as BG climbed by 2.7 percent and BP by 2.4 percent after the drop in US crude stockpiles. The sector was additionally buoyed by news that US natural gas supplies fell more than expected last week, while weather forecasts predicted a cold snap in the US Northwest early in December.
Property firm British Land rose 1.8 percent, following the previous session's property sector sell-off, inspired by analysts' concerns an expected boost in the UK government's pre-budget speech on December 5 would not materialise.
The government has been expected to introduce US-style tax efficient real estate investment trusts, but it is unclear what form they might take and how they might affect property firms.
On the downside, Prudential fell 0.5 percent after offering to buy out remaining shareholders in online bank Egg at 118 pence, five years after floating it at 160p. Prudential, Britain's second-largest listed life insurer, already owns 78 percent of Egg.
Online gaming firm PartyGaming fell 2.8 percent, the heaviest FTSE faller. Dealers said some investors found the timing right to sell after the stock rose earlier in the week to above the level of the initial public offering, 13 weeks after the company issued a warning on growth of the online poker market that wiped 3 billion pounds off market value.
Back on the upside, clothing retailer Next rose 2.7 percent on hopes the recent cold weather might stimulate demand for its winter ranges.
"Results from retailers like Kingfisher and MFI have all been less bad than expected. You've got Next recovering. People are hoping the recent UK cold snap will help them clear a bit of stock off the shelves. People are looking for the bottom of some of these shares," said Eden's Peterman.
Global bank HSBC rose 1.1 percent after saying its underlying third-quarter revenue growth outpaced a rise in costs. The news supported other banks, with Barclays and HBOS both up around 1 percent.
Mining stock Anglo American, punished in Wednesday's sell-off as the gold price fell from an 18-year peak, rose 1 percent, while Xstrata added 2.7 percent as copper prices headed to fresh records and gold rallied.
"The falls in one or two of the sectors yesterday were overdone. All the resource stocks took a tumble, and they're recovering today. It shows you what a fickle market it is," said a trader.
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