European stocks head for almost 4-month high, but Italy dents gain

European stocks headed toward an almost four-month high on Monday, after an easing in U.S.-China tensions fueled hopes a trade war between the worlds two largest economies can be averted.

But a slump in stocks in Italy proved a drag, as an antiestablishment, euroskeptic coalition made progress in forming a new government.

What are markets doing?

The Stoxx Europe 600 index
SXXP, +0.26%
climbed 0.3% to 396.01, on track for its highest close since Jan. 30, according to FactSet data.

Italys FTSE MIB index
I945, -0.77%
underperformed the rest of the region, falling 1.1% to 23,192.70. The move came as news reports said the 5 Star Movement and the League were ready to present a coalition cabinet.

The U.K.s FTSE 100 index
UKX, +0.66%
climbed 0.7% to 7,831.21, on course for a record closing high.

Frances CAC 40 index
PX1, +0.49%
rose 0.6% to 5,648.23. Germanys stock market
DAX, -0.28%
was closed for Whit Monday.

The euro
EURUSD, -0.1274%
fell to $1.1744 from $1.1771 from on Friday. The pound
GBPUSD, -0.3639%
fell to as low as $1.3395, trading around its lowest level since late December.

What is driving the market?

Traders in Europe were weighing the encouraging news in the U.S.-China trade spat against concerns over political developments in Italy.

U.S. Treasury Secretary Steven Mnuchin said on Sunday that the U.S. administration would put the trade war with China on hold while the two countries work on a deal to reduce the U.S. trade deficit with the Chinese. Meanwhile, China agreed to buy more U.S. products to narrow the trade gap, but held off from specifying a dollar amount.

Worries over a full-blown trade war between the worlds two largest economies have put pressure on markets recently, on fears it would slow global growth.

Italy in focus

In Italy, the countrys two biggest populist parties agreed on their proposed government cabinet at the weekend. They are expected to present their candidate for prime minister to President Sergio Mattarella on Monday. Depending on how this is received, Mattarella may announce a new government the same day.

If it takes office, the coalition looks set on a collision course with the European Union, having promised to challenge Brusselss budget guidelines and rules on immigration.

The two coalition parties have also vowed to increase fiscal spending and cut taxes moves some worry could throw the Italian economy into disarray and create a new sovereign debt crisis.

A failure by Italy to stick to the EUs financial rules could threaten stability of the entire eurozone monetary union, Frances economy minister, Bruno Le Maire, warned on Sunday.

The yield on 10-year Italian government bonds
TMBMKIT-10Y, +2.62%
rose 5 basis points to 2.266%, to trade around its highest level since July last year.

What are strategists saying?

The continued buoyancy in European markets is being helped in no small part by the weakness in both the euro and the pound against the U.S. dollar, while concerns about an escalation in tensions between China and the U.S. appear to have been deferred in the short term after progress in trade talks at the weekend, said Michael Hewson, chief market analyst at CMC Markets UK, in a note.

Check out: Sense of relief in equity markets is palpable analysts on U.S.-China trade truce

Stock movers

Shares of AstraZeneca PLC
AZN, +2.27%
AZN, -0.30%
rose 2.1% after the drug giant said the U.S. Food and Drug Administration has approved Lokelma for the treatment of adults with hyperkalemia.

International Consolidated Airlines Group SA
IAG, +0.94%
ICAGY, -0.81%
added 1.2% after reports the British Airways-parent is planning to make a 1.52 billion offer for Norwegian Air Shuttle ASA
NAS, -7.43%
. Norwegian Airs shares werent trading because the Oslo bourse was closed for Whit Monday.

Ryanair Holdings PLC
RY4C, +4.36%
RYAAY, +1.76%
rose 2.8% even after the budget airline warned on 2019 profit due to higher oil prices and pressure on fare prices.

Electricite de France SA
EDF, +1.26%
added 1%. The gain came after the Financial Times said the French energy giant is in discussions to sell a 49% stake in its U.K. windfarm portfolio.

Related Topics European Markets Europe Investing Stocks European Central Bank

Quote References SXXP +1.02 +0.26% I945 -180.24 -0.77% UKX +51.14 +0.66% PX1 +27.58 +0.49% DAX -36.89 -0.28% EURUSD -0.0015 -0.1274% GBPUSD -0.0049 -0.3639% TMBMKIT-10Y +0.06 +2.62% AZN +119.00 +2.27% IAG +6.40 +0.94% ICAGY -0.15 -0.81% NAS -20.10 -7.43% RY4C +0.68 +4.36% RYAAY +1.94 +1.76% EDF +0.16 +1.26% Show all references
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Sara Sjolin is a MarketWatch reporter based in London. Follow her on Twitter @sarasjolin.

Sara Sjolin

Sara Sjolin is a MarketWatch reporter based in London. Follow her on Twitter @sarasjolin.

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