European stocks recover after Trump delays EU tariffs in hopes of deal

By Nikhil Sharma and Purvi Agarwal

May 26 (Reuters) - European shares kicked off the week on a positive note on Monday, recouping the previous session's losses, as markets heaved a sigh of relief after U.S. President Donald Trump delayed his threat to impose a 50% tariff on the region.

The pan-European STOXX 600 index .STOXX closed 1% higher. It had lost 0.9% on Friday after Trump unexpectedly called for sharp tariffs on goods from the European Union, saying that negotiations with the region were not moving fast enough.

On Sunday, Trump extended the deadline for tariffs to July 9 from June 1, after European Commission President Ursula von der Leyen said the 27-nation bloc needed more time to produce a deal.

The automobiles and parts index .SXAP, sensitive to tariff-related pressures, led broader gains with a 1.8% rise. However, they were limited by a 3.3% decline in Porsche PSHG_p.DE.

Defence companies were among the biggest boosts to the STOXX 600 index, with Rheinmetall RHMG.DE and Leonardo LDOF.MI gaining over 3% each and the aerospace and defence index .SXPARO advancing 1.7%.

The stocks also pulled up the industrial goods and services sector .SXNP by 1.5%.

The defence and auto sectors helped German stocks .GDAXI rise by 1.7%, near a record high.

Luxury stocks, highly exposed to the U.S. market, also gained. Shares of Kering PRTP.PA, LVMH LVMH.PA and Richemont CFR.S rose about 1% each, as did the broader index .STXLUXP

"While more time for EU-U.S. negotiations is good news, the speed of the rebound in stocks suggests that investors may have become too optimistic on the path for trade discussions," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

The euro jumped along with other risk-sensitive currencies, while euro zone government bond yields were little changed, as Trump backtracked from his tariff threats.

Rising concerns about the U.S. economic slowdown and fiscal woes, underscored by Moody's credit rating downgrade on May 16, are pushing investors to limit their exposure to U.S. assets.

"If you want to have a low-risk portfolio, the U.S. is where you would go first, but with the trade tensions and geopolitical tensions, this favourable sentiment has shifted," said Ipek Ozkardeskaya, a senior market analyst at Swissquote Bank.

Trading volumes were lighter than usual due to public holidays in the U.S. and the UK markets. However, U.S. stock futures were up more than 1% each.

Thyssenkrupp TKAG.DE jumped 8.8% after a weekend report said the submarine and car parts maker plans to hold a shareholder meeting on August 8 to approve an expected spin-off of its warship division. Thyssenkrupp was not immediately available for comment.

Zealand Pharma ZELA.CO topped the STOXX 600 with a 10% advance.