By Callum Keown
European stocks nudged higher on Monday despite fresh U.S. tariffs on Chinese goods coming into force, as investors latched on to hopes of a resolution.
The Stoxx 600 climbed 0.3%, while the DAX rose just 0.1% as German Chancellor Angela Merkel and her coalition partners lost support in regional elections.
The FTSE MIB surged 0.8% as Italian Prime Minister Giuseppe Conte said he expected to complete a new government by Wednesday.
U.S. markets are closed on Monday for the Labor Day holiday.
What's moving the markets?
The latest round of U.S. tariff hikes on Chinese goods came into force on Sunday , with duties raised from 10% to 15% on $112 billion of imports.
China retaliated with fresh tariffs of its own and plans further hikes next month and in December.
However, the prospect of face-to-face talks between trade negotiators later this month and positive sentiments from both sides lifted markets.
Mark Haefele, global chief investment officer at UBS Wealth Management, said: "Despite the market's sanguine take, we believe the ultimate outlook for the trade dispute has become harder to predict with confidence.
"Since trade tensions have become the major driving force for stocks, even greater than monetary policy, we advise against adding significantly to equity exposure."
In Germany, Merkel's Christian Democrats and her Social Democrat coalition partners lost support to the far-right Alternative for Germany (AfD) in two regional elections on Sunday but held on to first place.
Which stocks are active?
AstraZeneca shares jumped 2.8% to all-time highs as the pharmaceutical company said Farxiga, its type-2 diabetes drug, reduced the chances of cardiovascular death or worsening heart failure by 26% in a recent trial.
Zurich-based recruitment firm Adecco rose 1.4% after Credit Suisse upgraded the company from neutral to outperform, citing improved macro conditions as an upside risk. The Swiss bank also upgraded Dutch recruiter Randstad, which climbed 1.1%.