London stocks fall as BoE keeps rates on hold; Middle East tensions persist

By Purvi Agarwal and Pranav Kashyap

(Reuters) -London stocks dropped to an over two-week low on Thursday as the Bank of England left borrowing costs unchanged, while the raging conflict in the Middle East kept risk-taking in check.

The benchmark FTSE 100 closed down 0.6%, with a stronger pound adding additional pressure on the index.

Trading was thin as U.S. markets are shut for a public holiday.

Israel and Iran's aerial attacks continued as U.S. President Donald Trump kept the world guessing about whether the U.S. would join Israel in air strikes on Tehran.

Markets were hopeful of talks between the U.S. and Iran, and between the European Union and Iran on Friday, leading to a potential de-escalation in tensions.

The conflict has impacted oil prices, which were higher on the day, boosting the energy sector by 1.3%.

Gains in heavyweight Shell and BP limited declines on the commodity-heavy FTSE 100.

Personal goods and travel and leisure stocks fell 4% and 2.3%, respectively, that led broader declines.

Industrial metal miners lost 2.5%, as copper prices hit a near one-week low.

The Bank of England held interest rates at 4.25% as expected on Thursday but said it was focused on risks from a weaker labour market and higher energy prices as conflict in the Middle East escalates.

"The big thing for UK equities ... is to see whether earnings can start picking up or not. It's something we haven't seen a lot lately and that is what really is missing," Lilian Chovin, head of asset allocation at the British private bank Coutts.

"The slight weakness in the labour market is something you're starting to see. It's an emerging trend of loosening employment markets across the world, which should pave the way for rate cuts, maybe in the back end of this year," Chovin added.

This follows a meeting of the U.S. Federal Reserve, where Chair Jerome Powell said he expected "meaningful" inflation ahead, due to Trump's planned tariffs, but policymakers still kept two rate cuts in 2025 on the table, offering little clarity on the overall stance.

Persimmon and United Utilities were among the worst performers of the FTSE 100, down 3.4% and 2.3%, respectively, as they traded without entitlement to their latest dividend payouts.

Midcaps in London fell 1%. Hays dragged with a near 10% loss after it warned of an annual profit miss.

(Reporting by Purvi Agarwal and Pranav Kashyap in Bengaluru; Editing by Mrigank Dhaniwala and David Evans)