European shares steady as trade tensions ease; Italy outperforms

European shares stabilized on Monday as trade tensions between the United States and China eased somewhat while the potential for a coalition arrangement to form a new government in Rome thrust Italian stocks higher.

The pan-European STOXX 600 index ended flat, clawing background after a Friday sell-off ignited by yet another tit-for-tat round of tariffs between the world's two largest economies. Trading volumes were thinned out by a UK holiday.

European equity markets were almost certain to follow their Asian counterparts into deep losses but recovered after U.S. President Donald Trump said Beijing had contacted Washington to say it wanted to return to the negotiating table. The change in tone came after China said it was willing to resolve the trade dispute with the U.S. through "calm" negotiation.

Trade-sensitive auto stocks led gains on the benchmark, having fallen 2% in the previous session after China announced fresh tariffs on certain U.S. goods. "We are expecting a trade deal between China and U.S. towards the end of the year, but that further escalation was in our scenario," said ING economist Timme Spakman.

On one hand, it would inflict more pain on China and increase willingness to make a deal, though Trump will also be in need of a deal ahead of U.S. elections, Spakman added. In the meantime, sentiment remains jittery. Munich-based Ifo institute said it is business climate index fell to the lowest level since November 2012, a further sign of the expected damage to the Garman economy, Europe's largest, from the U.S.-China trade conflict.

Incorporate news, German real estate stocks came under pressure after a report that Berlin's city government plans to cap rents. Shares in Deutsche Wohnen slid nearly 3%. European stocks have swung wildly in August over worries that the U.S.-China trade war will eventually tip the global economy into recession, setting the STOXX 600 on course to end August lower.

ITALY UPLIFT

Italian markets outperformed, with Milan's FTSE MIB closing 1% higher as the opposition Democratic Party (PD) and the anti-establishment 5-Star Movement moved closer to a deal on forming a coalition government. The sticking point lingering between the two traditionally antagonistic parties is whether or not caretaker prime minister Giuseppe Conte stays in his job to lead a new alliance. "With all major players of the center-left apparently eager to avoid snap elections, chances are that the distribution of top jobs can eventually be resolved," said Berenberg economist Holger Schmieding.

If they fail to come to an agreement, Eurozone's third-largest economy could be staring at months of political uncertainty at a time when it is facing economic stagnation, a mounting fiscal deficit and potential conflict with the European Union over its budget plans.

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