By Helen Reid
LONDON (Reuters) - European shares climbed on Monday after a market-friendly speech by U.S. Fed Chairman Jerome Powell and signs of progress on a U.S.-Mexico NAFTA trade deal, which drove car stocks higher.
The pan-European STOXX 600 rose 0.3 percent by 0725 GMT, with Germany's DAX up 0.4 percent, following new record highs from the U.S. S&P 500 and Nasdaq after Powell kept to the Fed's forecast for "gradual" interest rate hikes.
British markets were closed for a public holiday, making trading volumes especially thin across the region. The STOXX 600 was through only 6 percent of its average daily volume in the first 90 minutes of trading - usually the busiest.
Auto stocks were the strongest performers, up 0.9 percent after U.S. President Donald Trump said on Saturday that a trade deal with Mexico was near.
Jesus Seade, who will serve as chief negotiator for Mexico's next government, said the issue of auto sector rules was "basically resolved" in discussions with U.S. Trade Representative Robert Lighthizer.
"The biggest risks the market were discounting were trade wars, so any reduction in trade war risk such as NAFTA talks or even Trump trying to find bilateral deals, has pushed U.S. shares to new records and will support markets," said Angelo Meda, head of equities and portfolio manager at Banor SIM in Milan.
BMW, Volkswagen <VOWG_p.DE>, and Daimler rose 1 to 1.6 percent. The German carmakers rely on smooth trade between Mexico and the U.S. to sell vehicles made in Mexican manufacturing plants into the U.S. market.
Outside trade-driven moves, Metro shares surged 12.5 percent after Ceconomy announced it may join family-owned Haniel in selling a stake in the German retailer to an investor group led by Czech billionaire Daniel Kretinsky.
Lundin Petroleum shares climbed 4 percent after Norway's Equinor increased its resource estimate for the Johan Sverdrup oilfield, in which Lundin has a 22.6 percent stake. [nL8N1VI0I4]
Equinor, which has a 40 percent stake in the field, gained 0.9 percent.
Another strong boost to the STOXX came from Swiss drugmaker Novartis. Its shares were up 0.5 percent after the company received European approval for Kymriah, its gene-modifying therapy for blood cancer.
Shares in Spanish discount retailer DIA rose 4 percent to the top of the IBEX after a report that Russian magnate Mikhail Fridman has started talks with other shareholders over a possible takeover bid by his LetterOne fund.
In other movers, Germany-listed shares of U.S. electric carmaker Tesla fell more than 5 percent in early deals on the Tradegate exchange, indicating the U.S. stock will take a hit after Chief Executive Elon Musk called off his bid to take the company private.
Overall, the STOXX 600 is down 1.2 percent year-to-date as political developments in Italy and Turkey weighed on the market and particularly banking stocks.
While earnings growth has been strong, with companies delivering 10.9 percent year-on-year growth for the second-quarter earnings season, valuations are low as investors look ahead to risks like Italy's budget set to be thrashed out in September.
"Europe is one of the cheapest markets in the world, there is for sure a risk premium implied in the valuation," said Banor SIM's Meda.
Italy's FTSE MIB underperformed rivals, trading down 0.2 percent.
"The only cloud on the horizon is Italy," Meda added. "The feeling I have is nobody has any will to take any risk in the next couple of weeks before we get more clarity on the budget."
(Reporting by Helen Reid; editing by John Stonestreet and Jane Merriman)