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Sept 5 (Reuters) - UK's FTSE 100 index ended slightly higher on Monday as commodity stocks gained, while investors looked ahead to the appointment of Liz Truss as Britain's new prime minister against a deteriorating economic backdrop.
The commodity-heavy FTSE 100 ended 0.1% higher, after falling as much as 1.2% earlier in the day, while the domestically oriented FTSE 250 shed 1.2%.
Oil majors Shell and BP gained 1% and 2.1% respectively on firm crude prices, while miners added nearly 2%.
After weeks of an often bad-tempered and divisive leadership contest, Truss, who is UK's foreign minister, beat former finance minister Rishi Sunak in a vote of Conservative Party members.
Truss takes over as the country faces a crunch on household finances, industrial unrest, a recession and war in Europe. She has vowed to press ahead with promised tax cuts and action to tackle a deepening energy and cost of living crisis.
Hopes of policy support boosted some shares of retailers including Next and JD Sports.
"Policy uncertainty and volatility is likely to rise during her term given the policies," Sonali Punhani, chief UK economist and director at Credit Suisse said.
"Markets are also concerned about the hard-line approach towards the European Union or Northern Ireland."
However, some investors are alarmed that tax cuts promised by Truss could aggravate Britain's inflation problem, speeding up the Bank of England's interest rate hikes and worsening a recession that the BoE expects to start this year.
"Tax cuts promised in Truss's leadership campaign add up to 17 billion pounds ($19.58 billion) in FY22/23, rising to 29 billion pounds the following year. But they will still not be nearly enough to offset the impact of recent energy price rises," Elizabeth Martins, senior economist at HSBC wrote in a note.
Also weighing on sentiment was Russia's extension of a halt to flows on the Nord Stream 1 gas pipeline to Europe, which exacerbated concerns winter fuel shortages and the impact on growth.
A survey showed Britain's economy ended August on a much weaker footing than previously thought as overall business activity contracted for the first time since February 2021 in a clear signal of recession.
Homebuilder Countryside jumped 5.2% after rival Vistry agreed to acquire the company for about 1.25 billion pounds ($1.43 billion) to bolster its affordable housing business. ($1 = 0.8684 pounds)
