By Sudip Kar-Gupta
LONDON (Reuters) - The FTSE 100 hit a 1-1/2 month high on Monday as Lawrence Summers quit the race to head the U.S. Federal Reserve, boosting prospects of a more measured scale-back in economic stimulus measures.
The blue-chip FTSE 100 index ended up by 0.6 percent, or 39.06 points, at 6,622.86 points, marking its highest close since ending at 6,647.87 points on August 2.
The financial sector contributed the most points to the FTSE's rise, adding 10.6 points to the index, although miner Fresnillo slumped 12.8 percent to the bottom of the FTSE after failing to enter a key exchange tracker fund.
Equity markets worldwide were boosted by Summers' decision to drop out of the race to become the next head of the Fed, with Janet Yellen now seen as the new front-runner.
Yellen is regarded by investors as more supportive than Summers of the Fed's bond-buying programme known as "quantitative easing" (QE), which has driven much of this year's global equity rally, with the FTSE 100 up 12 percent since the start of 2013.
Prospects that the Fed will this week start to scale back or taper its bond-buying programme has led to a recovery in bond yields, which in turn has boosted bank and insurance shares, since higher yields could see them make more money on interest margins and their bond investments.
In a further sign of growing confidence towards the financial sector, the British government said it planned to start selling down its stake in Lloyds, the bank that was part-nationalised after a bailout during the 2008 financial crisis.
Lloyds closed up 1 percent at 77.36 pence on Monday, before the government made its statement.
"If you think bond yields are going to rise from here, you've got to load up with financials," said Leigh Himsworth, head of UK equities at City Financial, which manages around 1 billion pounds ($1.6 billion) worth of assets.
The Fed meets from Sept 17-18 this week, with many expecting the start of a scale-back to its quantitative easing programme.
According to a Reuters poll of 69 economists, a $10 billion reduction in the Fed's programme is expected.
Terry Torrison, managing director at Monaco-based McLaren Securities, said the FTSE 100 could retreat in the run-up to the Fed meeting but added that on a longer-term basis, he was betting on further gains on the market with "long" positions.
"In the very short-term, I'm sitting on the fence, but going forward, I'd still prefer to be 'long' and look to buy on weakness," he said.
However, Himsworth felt that even if the FTSE rose towards the end of 2013, it was unlikely to get back to the 13-year high of 6,875.62 points it reached in late May this year, due to the fact that there would be less help from the Fed going forward.
Himsworth saw the FTSE ending 2013 between 6,600-6,700 points.
"Going forward, we may well enjoy the benefits of the economic recovery but we may well have already seen the best of the bounce," he said. ($1 = 0.6303 British pounds)
(additional reporting by David Brett; editing by Ron Askew)