European shares start August higher on US-Iran diplomacy hopes

European shares rose on Monday as oil prices dropped sharply, with the pan-European STOXX 600 index up 0.4% due to eased fears of supply disruptions in the Middle East.

European shares rose on Monday as oil prices dropped sharply after U.S. President Donald Trump said talks with Iran were expected later in the day, raising hopes that ‌diplomacy could avert a further escalation in the conflict.

The pan-European STOXX 600 index was up 0.4% at 651.69 points by 8:50 GMT, with most major regional bourses trading higher. Germany's DAX led the gains, jumping 1.4%. Energy stocks fell 1% as oil futures slid more ‌than 4%. Trump's decision to hold off on a fresh attack on Iran, while seeking a rapid agreement to curb Tehran's ‌nuclear ambitions and reopen the Strait of Hormuz, eased fears of further supply disruptions.

"For now, it seems like a step in the right direction, but I'm sceptical that this will last," Daniela Hathorn, senior market analyst at Capital.com, said. "Everyone is waiting to see the latest developments in the Middle East, and that ⁠remains the ​main driver of market momentum."

The fall ⁠in crude prices boosted oil-sensitive sectors. Travel and leisure gained 1.6%, while automobiles and parts rose 2.2%. Aerospace and defence stocks were the strongest sectoral performers, rising 2.6%, ⁠while the luxury index advanced 1.7%.

The STOXX 600 added more than 1% in July, with resilient earnings helping investors look past the economic fallout ​from the U.S.-Iran conflict. The turmoil had pushed Brent crude above $90 a barrel, a particular concern for Europe given ⁠the region's dependence on imported energy. M&A activity also commanded investors' attention, as markets assessed a fresh batch of deal announcements and reports of potential tie-ups.

AstraZeneca shares bottomed ⁠the ​STOXX 600, down 6% after a reported possiblemerger of the European pharmaceutical giant with U.S.-based Bristol Myers Squibb. Healthcare sector fell 0.4%. Prysmian fell 2.3% after agreeing to buy U.S. electrical products maker Atkore for $95 per share in cash, implying an enterprise value of ⁠about $3.8 billion.

TotalEnergies edged down 0.8% after Shell said it would sell its onshore European renewables business to the French energy company ⁠as the British oil major ⁠continues to scale back its low-carbon investments. Separately, an ECB Economic Bulletin article published on Monday said euro zone household consumption fell sharply in the early weeks of the Iran war as confidence tumbled, ‌underscoring the economic risks ‌of any renewed escalation in the region.