Stock markets rose amid speculation, later denied, that incoming US president Donald Trump may impose lower tariffs on imports.

Mr Trump has pledged to hike tax on a range of imported goods from China, Europe and Central America, prompting concerns that it could see a return of inflation.

Market talk that the tariffs may not be at the top end of speculation triggered a 1.7% rally in the Nasdaq and a 1.1% advance in the S&P 500 in early trade. The tariff talk weighed on the dollar.

IG chief market analyst Chris Beauchamp said: “Stocks have made solid gains around the world today on hopes that the incoming US administration will look to take a more targeted approach on tariffs than previously feared.

Dan Coatsworth, investment analyst at AJ Bell, added: “Investors are beginning to think Donald Trump’s bark could be worse than his bite when he returns to the White House in a fortnight’s time.

“Chatter that the incoming US president’s tariffs might only be applied to critical imports has put a spring in the market’s step. Such a move would be positive not just for global trade but also for the US economy as it could dilute prospects for inflation to rear its ugly head.”

However, the president-elect said on his social media platform, Truth Social, that an article in the Washington Post that sparked the rumours was “wrong” and that it “incorrectly states that my tariff policy will be pared back”.

The National Institute of Economic and Social Research has said that global tariffs of just 10% would have a negative impact on the UK’s economy of 0.8% next year, equivalent to a hit of £21.5 billion.

Gains in London were more modest as investors navigated a backdrop of lacklustre UK economic data and a downbeat survey on confidence from the British chambers of Commerce.

The FTSE 100 index rose 0.31% to finish at 8,249.66 points, while the FTSE 250 managed a smaller rise of 0.1%.

Growth in the UK service sector remained sluggish in December, with the S&P Global services purchasing managers’ index signalling marginal expansion.

The composite PMI, which combines manufacturing and services data, slipped to 50.4, its weakest reading since October 2023.

Employment in the service sector fell at its fastest pace in nearly four years, compounding concerns.

On London’s equity markets, Rolls-Royce Holdings slid 2.19% after Citi downgraded the aerospace and engineering group to ‘neutral’ from ‘buy’, citing valuation concerns. The shares, which have doubled in the past year, closed 15p, or 2.56%, lower at 570p.-15.00.

Russ Mould, investment director at AJ Bell, said: “Even though Citigroup raised its price target for the stock, investors appear to have taken the rating downgrade as a signal to lock in some profit.

“Rolls-Royce has been a runaway success for investors in recent years as its recovery story gained traction.

“The turnaround opportunity is now looking like old news and investors increasingly want to hear about the next phase of the company’s growth, not simply what it is doing to get back on track as that looks to have already happened.”

Heading upwards was housebuilder Barratt Redrow which climbed 1.28% after Redburn upgraded the stock to ‘buy’.