By Amy Caren Daniel and Agamoni Ghosh
(Reuters) - A surge for Frankfurt's DAX drove European stock markets higher on Tuesday as German and Swiss investors returned from a holiday extended weekend and signs of more government stimulus in China bolstered commodities markets.
Optimism over President Donald Trump's decision late on Friday to hold off on imposing import tariffs on Mexico has lifted sentiment this week, but there were signs late on Monday that the administration will make more threats to further its agenda in talks with major trading partners.
Secretary of State Mike Pompeo warned that the United States could still slap tariffs on Mexico if not enough progress was made on its commitment to stem illegal immigration.
Europe's pan-regional STOXX 600 index rose 0.6% by 0805 GMT, with miners and auto stocks raking in the biggest gains after reports that Beijing was opening the door to more spending by local governments.
"Germany back from holiday seems to be playing catch-up, with the tariff news helping sentiment," said Mike van Dulken Head of Research at Accendo Markets in London.
"Over all, it's the easing in trade tensions that's playing into markets."
The trade-sensitive DAX rose 1%, helped by gains in car makers BMW, Daimler and Volkswagen (DE:VOWG_p) AS.
Worries about the impact of tensions between the United States and China on the pace of growth in the world's major economies drove a nearly 6% fall in European stock markets in May, their worst month in more than two years.
But the uncertainty in turn has spurred hopes that U.S. interest rates will be cut as early as next week, pulling more money back into riskier investments including stocks.
Trump said on Monday he was ready to impose another round of punitive tariffs on Chinese imports if he cannot make progress in trade talks with Chinese President Xi Jinping at the G20 summit.
"Trump is a master of keeping us on our toes and we've had similar threats before but it has been deferred," van Dulken said.
Madrid's bank-heavy IBEX was the only laggard, after Morgan Stanley (NYSE:MS) lowered its earnings estimates for Spanish banks for 2020 and 2021, factoring in a flatter yield curve as a result of the European Central Bank's swing toward taking new steps to reduce interest rates.
Novo Nordisk (CSE:NOVOb) rose about 5%, the most on the benchmark index, with data on cardiovascular outcomes from competitor Eli Lilly's diabetes drug seen as underwhelming.
Hugo Boss rose 4% after shares of the German fashion house were upgraded to "equal-weight" from "underweight" by Morgan Stanley for the luxury retailer's strategic plan to reposition the brand under two labels.
British fashion retailer Ted Baker tumbled 25.6%, after it issued a disappointing annual profit forecast, citing an "extremely difficult" start to 2019.