UK's stock indexes close higher after truss resigns

The blue-chip FTSE 100 rose 0.3%, but gains were capped as a jump in the pound hurt dollar earners

UK's main stock indexes closed higher on Thursday after Liz Truss said she would resign as British prime minister, bringing a measure of relief to investors after her ill-fated tax plans unleashed turmoil in financial markets.

The blue-chip FTSE 100 rose 0.3%, but gains were capped as a jump in the pound hurt dollar earners such as AstraZeneca and Diageo.

The battered FTSE 250 index, more exposed to the domestic economy, climbed 0.8%.

Homebuilders, retailers, REITs, and real estate, which suffered the brunt of selloff recently due to macroeconomic concerns sparked by the UK's fiscal makeover, gained between 0.9% and 2.3%.

Truss was forced to abandon almost all of her fiscal policy programme earlier this week after it caused a bond market rout that forced the Bank of England to intervene, shattered investor confidence, and enraged much of her Conservative Party.

Pressure on Truss had mounted in recent days and a leadership election will be completed within the next week.

Overall, the resignation of Truss is a step that needed to happen for the UK government to move further along the path towards restoring credibility in the eyes of the financial markets, said Paul Dales, chief UK economist at Capital Economics in London.

But more needs to be done and the new prime minister and their Chancellor have a big task to navigate the economy through the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis. The situation is clearly going to evolve very quickly, he said.

A semblance of calm in markets surfaced with Britain's five-year credit default swaps (CDS) - instruments used to hedge against a default - easing to 37 basis points (bps) after closing at 40 bps on Wednesday.

Investors reined in bets of a full percentage-point interest rate hike by the Bank of England next month, after a top official said it remained to be seen whether rates rise as sharply as the market has been expecting.