European stocks rallied on Wednesday as comments from both sides of the Middle East war gave some conviction for a near-term end to hostilities.

“The market appears increasingly optimistic that an end to the war in Iran is in the offing as big gains in the US and Asia were matched in Europe,” said AJ Bell investment director Russ Mould.

The FTSE 100 closed up 188.34 points, 1.9%, at 10,364.79. The FTSE 250 ended up 484.48 points, 2.3%, at 21,688.19, and the AIM All-Share advanced 22.13 points, 3.1%, at 739.25.

On Wednesday, US President Donald Trump said that Iran had asked for a ceasefire but that the US would only consider this once the Strait of Hormuz, the vital oil and gas shipping route which Iran has effectively closed for most exports, is clear for shipping.

This came after Mr Trump told reporters on Tuesday the US would end operations in Iran “very soon”, perhaps within “two weeks, maybe three”.

The US president is due to make a televised address later on Wednesday.

Meanwhile, Iranian President Masoud Pezeshkian said the Islamic republic had the “necessary will” to end the war, provided its enemies guaranteed it would not flare up again.

But Israeli Prime Minister Benjamin Netanyahu insisted that Israel would press ahead with its military campaign and that “we will continue to crush the terror regime”.

Brent oil traded lower at 101.83 dollars a barrel on Wednesday afternoon, from 107.38 dollars late on Tuesday.

In European equities on Wednesday, the CAC 40 in Paris closed up 2.1%, while the DAX 40 in Frankfurt rose 2.7%.

Stocks in New York were higher, extending Tuesday’s bumper gains. The Dow Jones Industrial Average was up 0.9%, as was the S&P 500 index, and the Nasdaq Composite advanced 1.3%.

Michael Brown, senior research strategist, at Pepperstone pointed out that amid the “euphoria, exuberance, and relief” which has driven a rebound in risk appetite over the last day or so, the surge in energy prices means that a rise in headline inflation over the next few months is, essentially, “baked in”.

“Added to which, considerably higher energy prices, and continued supply chain disruption, are likely to bring with them substantial growth headwinds, in turn amounting to a notable negative demand shock, which will likely weaken what is already very anaemic economic momentum, most notably in Europe,” he said.

Mr Brown does not think financial markets have “ignored” these risks, but are essentially “parking these worries, to be dealt with on some other day in the future”.

Reflecting these concerns, the Bank of England said the Middle East war had caused “a substantial negative supply shock to the global economy”, increasing risks to the financial system.

The central bank said the fallout will also weigh on economic growth and tighten financial conditions, such as restricted lending by banks.

“Adverse impacts on the global macroeconomy increase the likelihood that multiple vulnerabilities could crystallise at the same time, amplifying their effect on financial stability,” the Bank said in a quarterly update on identifying risks to financial stability.

Bank governor Andrew Bailey sought to dampen expectations of interest rate hikes.

In an interview with Reuters, Mr Bailey responded to market expectations for higher rates by commenting “that is a ​judgment markets have to make but I think they’re getting ahead of themselves”.

Prime Minister Sir Keir Starmer said the UK could weather the economic storm caused by the Iran conflict but acknowledged the crisis will “affect the future of our country” as households faced higher fuel costs now and the prospect of energy bill hikes later this year.

The UK is leading a diplomatic initiative to reopen the Strait of Hormuz, but restoring the flow of global trade will not be easy, Sir Keir admitted.

Foreign Secretary Yvette Cooper will host an international meeting on Thursday to “assess all viable diplomatic and political measures” to reopen the strait, after 35 countries signed up to a statement expressing willingness to contribute to efforts to ensure safe passage for shipping.

The yield on the US 10-year Treasury narrowed to 4.31% on Wednesday from 4.33% on Tuesday. The yield on the US 30-year Treasury ebbed to 4.89% from 4.91%.

The pound rose to 1.3324 dollars on Wednesday afternoon from 1.3205 dollars at the equities close on Tuesday. Against the euro, sterling firmed to 1.1476 euro from 1.1463 euro.

The euro stood higher against the greenback at 1.1608 dollars from 1.1523 dollars. Against the yen, the dollar was trading lower at 158.66 yen compared to 159.02 yen.

On the FTSE 100, the risk-on mood saw gains for banks Lloyds, up 5.8%, NatWest, up 5.4%, and Barclays, up 5.1%.

British Airways owner, International Consolidated Airlines, flew 5.7% higher, budget airlines easyJet and Wizz Air soared 5.0% and 6.2% respectively.

But housebuilder Berkeley Group plunged 9.7% as its decision to halt land buying amid the uncertainty sparked by the Iran war sparked significant profit downgrades.

In an unscheduled trading update, the Surrey-based housebuilder said its fears, expressed in a recent trading statement, that the economic consequences of the conflict in the Middle East could reduce confidence in a near-term market recovery has “now become a reality”.

The builder said it is reducing work in progress investment to match current sales levels and will not acquire new land.

Berkeley anticipates delivering above £1.4 billion of pre-tax profit, over financial 2027 to 2030, which analysts at RBC Capital Markets said was 29% below Visible Alpha consensus of £1.98 billion.

Mr Mould said Berkeley has a “long-standing reputation for being adroit at calling the ups and downs of the property market”.

“In that context, the moves the company has announced today will make others sit up and take notice,” he said.

Rightmove fell 1.4% as it said it will “defend vigorously” a proposed class action claim filed against it, as estate agents accuse the firm of charging excessive fees.

The London-based online property portal confirmed it is aware of reports that an application to commence collective proceedings has been filed with the UK’s Competition Appeal Tribunal.

On the FTSE 250, Trustpilot climbed 7.3% as Panmure Liberum upgraded to “buy” from “hold”, while Raspberry Pi extended Tuesday’s bumper gains with a further 13% rise.

Gold traded at 4,781.92 dollars an ounce on Wednesday, up from 4,613.15 dollars at the same time on Tuesday.

The biggest risers on the FTSE 100 were Babcock International, up 110.0p at 1,268.0p, Rolls Royce, up 75.0p at 1,207.0p, 3i Group, up 146.0p at 2,584.0p, Endeavour Mining, up 260.0p at 4,720.0p and Fresnillo, up 192.0p at 4,720.0p.

The biggest fallers on the FTSE 100 were Berkeley Group, down 332.0p at 3,104.0p, BP, down 30.3p at 576.0p, Shell, down 139.5p at 3,443.5p, Rightmove, down 6.0p at 422.9p and British American Tobacco, down 58.0p at 4,313.0p.

Thursday’s global economic calendar has trade figures in the US and Canada, and US weekly jobless claims.

Thursday’s domestic corporate calendar has half year results from Baillie Gifford Japan Trust.

– Contributed by Alliance News