By Ankika Biswas, Ozan Ergenay and Johann M Cherian
(Reuters) -Europe's benchmark stock index closed on a subdued note on Monday, as energy shares dropped on weak oil prices and offset gains in industrials, while investors were on guard as they watched out for developments in the Middle East.
The pan-European STOXX 600 ended 0.1% higher. Industrials and automobiles rose 0.8% and 0.7%, respectively, after the Ifo economic institute said German manufacturers are no longer acutely affected by material shortages, with the supply situation almost back to how it was before the COVID-19 pandemic.
Investors were on the look out for any developments in the Middle East after Iran launched a retaliatory attack on Israel over the weekend, raising the threat of a wider regional conflict.
European defence stocks advanced 0.8%, in line with their U.S. peers.
"The EU's trade exposure to Iran is small... but the continued escalation of geo-political tensions will likely lead to more expensive supply chain protection and thus higher oil prices," Citi analysts wrote.
Energy-related shocks have been a strong factor driving inflation in Europe and globally.
However, oil prices fell over 1% as the market downplayed the risk of broader regional conflagration after Iran's attack, pushing energy stocks down 1.5%.
Providing some relief, policymaker Gediminas Simkus said the ECB could deliver over three rate cuts this year, while other officials including Olli Rehn, Peter Kazimir and Francois Villeroy de Galhau acknowledged the central bank's progress on inflation.
European shares have been on a record-breaking drive since 2023 end, thanks to investors' growing confidence around monetary policy easing this year and excitement around artificial intelligence (AI).
Luxury giants including LVMH (EPA:LVMH), Hermes and Richemont (LON:0QMU) gained over 1% each, with the broader luxury sector also rising 1%, after hitting a near two-month low on Friday.
The earnings season is set to pick up steam with results from LVMH, Nokia (HE:NOKIA), Ericsson (BS:ERICAs) and ASML (AS:ASML) due through the week.
Among headlining stocks, Temenos jumped 19.5% after a special committee appointed by the financial software company said allegations made by Hindenburg Research were "inaccurate and misleading".
Adidas (ETR:ADSGN) rose 4.2% after brokerage Morgan Stanley (NYSE:MS) double-upgraded the German sportswear maker to "overweight" from "underweight".
Prysmian SPA climbed 4.5% following the Italian cable maker's plans to acquire Encore Wire.
Logitech dropped 6.4% after Morgan Stanley downgraded the Swiss-American computer equipment maker to "underweight" from "equal-weight", while Julius Baer lost 4.8% as the Swiss wealth manager traded ex-dividend.
Lufthansa slumped 4.6% after slashing its 2024 earnings outlook.