LONDON Mining companies led UK shares higher on Thursday after data from China showed a recovery in profits at industrial firms, a sign that the country's economy is gaining momentum.
The UK market has reopened after the Christmas holiday hoping for progress in the U.S. budget negotiations now President Obama has returned from vacation early to try and get a deal done.
Miners .FTNMX1770 and industrial metals companies .FTNMX1750 were up 1.6 and 3.3 percent respectively after data showed that annual profit growth at China's industrial companies jumped 22.8 percent in November from a year earlier, accelerating from 20.5 percent in October.
The China data prompted a rally in the copper price, which rose to a one-week high. Chinese stocks .SSEC hit six-month highs after the data.
Six of the top seven gainers in the FTSE 100 index .FTSE were in the materials sector.
"It's starting to look like a traditional cyclical rally. It's very thin volumes, but if you're looking for a correlation with events in China, then the miners are an obvious way to play that," Alan Higgins, Chief Investment Officer at wealth management firm Coutts, said.
Materials, financials and energy, the three leading cyclical sectors, combined to add more than 18 points to the index. Utilities, healthcare and consumer staples, considered "defensive" plays, were the only sectoral fallers.
At 1237 GMT, the FTSE 100 was up 40.70 points, or 0.7 percent at 5,994.88. Volumes were just 19 percent of the 90-day average.
FISCAL CLIFF FOCUS
Signs that the U.S. budget impasse may be resolved before an end-of-year deadline supported the gains, with U.S. House Speaker John Boehner offering to consider any bill the Senate produced.
Major tax hikes and spending cuts known as the "fiscal cliff" will come into force in the United States on January 1 unless the White House and Democrat-controlled Senate and the Republican-run House of Representatives reach a budget deal to avoid an abrupt economic slowdown.
"I think it's dangerous to be short in this environment, in case there is a resolution to the fiscal cliff," Higgins said.
Gains in equities are likely to be limited until there is more concrete progress in Washington.
"The fiscal cliff remains at the forefront of investor focus, with little progress being seen," said Mike Mason, a senior trader at Sucden Financial Private Clients.
"Until there is a resolution, the final sessions of 2012 are unlikely to really take off."
Investors in UK stocks will also watch for a batch of U.S. data later in the day, with weekly U.S. initial jobless claims due at 1330 GMT and December U.S. consumer confidence and November U.S. new home sales numbers at 1500 GMT.
(Additional reporting by Jon Hopkins. Editing by Jane Merriman)