European shares rise as oil falls on Middle East deal hopes

By Johann M Cherian and Avinash P

Nov 2 (Reuters) - European shares started the week higher on Monday as market expectations that talks to end the US-Israeli war with Iran could make progress drove down oil prices and boosted risk appetite.

The pan-European STOXX 600 index .STOXX ended 0.42% up at 649.44 points and hovered near a two-month high. Spain's IBEX .IBEX gained 1.63% and led regional bourses higher.

Brent crude fell by more than 7% following three days of discussions between Iranian and Qatari officials.

"We see the market reaction ... it's at least partly related to hopes of a de-escalation in the Middle East," said Richard Flax, chief investment officer at Moneyfarm.

Investor sentiment has shifted before on previous hints of a diplomatic breakthrough to end the war that began at the end of February.

European equities are particularly sensitive because of the region's reliance on energy imports.

Lower oil prices propped up the travel and leisure .SXTP sector, which rose 3%, registering its steepest one-day gain since June.

Conversely, energy stocks .SXEP fell 2.3% and led declines on the STOXX index. High energy prices helped the sector to report earnings growth of 139% for the third quarter, LSEG I/B/E/S data showed.

As AI-linked stocks have retreated on concerns about the amount of money the sector has invested, the STOXX 600's lower exposure to the sector helped it to outperform the US benchmark S&P 500 .SPX in October.

The healthcare sector .SXDP logged its steepest monthly gain of 14% since February 1987, although it eased 0.6% on Monday.

"Healthcare had some really strong tailwinds that helped it along last quarter. The first one was the selloff in tech, which boosted its attractiveness because it's a real defensive sector and secondly, they have some really good earnings news," said Kathleen Brooks, research director at trading and investment platform XTB.

Bavarian Nordic BAVA.CO rose 2.4% after the vaccine maker secured a four-year contract from the British government for its vaccine against mpox and smallpox, and announced share buyback plans.

Chip stocks such as Aixtron AIXGn.DE and Infineon IFXGn.DE added 3.9% and 2.9%, respectively, recovering from a selloff in the tech sector last week following disappointing results from US-based hyperscalers.

Among other movers, Alstom ALSO.PA lost 26% and hit its lowest since March 2024. The company cut its forecast as execution problems on its Coradia Max platform in Germany dented half-year profitability. It also said it expects negative free cashflow for the year compared with a positive forecast earlier.

Ryanair RYA.I rose 5.2% on announcing cost cuts after reporting a 6% fall in net profit.

Elsewhere, manufacturing activity grew in October, albeit at a slower pace than previously as new order growth slowed and rising costs from energy and supply-chain disruptions squeezed margins.