UK shares dip as investors focus on earnings, rate path

(Reuters) -London's blue-chip index closed lower on Wednesday as investors assessed a batch of corporate earnings, while scrutinising developments in the Middle East as well as the outlook for monetary policy.

The FTSE 100 closed down 0.5%, while the mid-cap FTSE 250 dipped 0.1%.

After markets closed, the Wall Street Journal reported that British oil giant Shell is holding early-stage talks to acquire rival BP in what would be the largest oil deal in a generation.

U.S.-listed shares of BP jumped 7%, while those in Shell were down 3.8%.

Global markets rallied earlier in the week after a ceasefire between Iran and Israel ended a 12-day air war between the two countries.

Global stocks stalled near record highs as investors shifted their focus to U.S. inflation and the prospect of rate cuts by the Federal Reserve.

Britain's labour market is showing further slowdown signs, according to surveys which pointed to below-inflation pay growth and a fall in job vacancies.

Bank of England Governor Andrew Bailey on Tuesday pointed to signs of a softer labour market and said interest rates were likely to keep falling.

In earnings-driven moves, defence engineering company Babcock topped the blue-chip index with a 10.7% gain after upgrading its medium-term guidance as it expects to benefit from boosted defence spending.

Fellow defence names Rolls-Royce and BAE Systems gained about 1% each. The broader sector is one of the best performing on the FTSE this year.

Defence stocks were further buoyed as Britain announced at the NATO summit plans to acquire 12 F-35A fighter jets capable of deploying tactical nuclear weapons.

Burberry rose 4.8% as brokerages turned relatively upbeat on the British luxury brand before its first quarter trading statement on July 18.

Wealth manager Liontrust Asset Management fell 13% to the bottom of the small-cap index after reporting a drop in annual profit due to tariff-related market volatility.

(Reporting by Twesha Dikshit, Ankita Yadav and Sruthi Shankar; Editing by Tasim Zahid and Ed Osmond)