Europe's STOXX 600 treads water at start of data-intensive week; Germany stocks notch record close

European shares were little changed on Monday, as investors analysed economic data for clues on the European Central bank's policy trajectory, while Germany's DAX index hit a record close, even as populist wins in state elections injected uncertainty.

The pan-European STOXX 600 index .STOXX was little changed at 524.94 points, still hovering around its record highs touched last week after data showed euro zone inflationfell to its slowest pace in three years.

Meanwhile, German stocks .GDAXI rose 0.1 per cent to close at a record high of 18,930.85. That occurred even as state elections saw wins for the far-right Alternative for Germany (AfD) and leftist populist Sahra Wagenknecht Alliance (BSW), a heavy blow for Chancellor Olaf Scholz's already fragile ruling coalition.

"(German state elections) are partly a loud political wake-up call before the parliamentary elections in September next year ... that Germany and France – the European Union's leading duo – are moving towards growing political instability and weakness should worry the entire EU," analysts at SEB wrote in a note.

On the economic front, a survey showed that the downturn in Germany's manufacturing sector continued to gather pace in August. For the euro zone, manufacturing activity remained mired in contraction in August, with demand slipping at its sharpest pace this year.

Money markets have almost fully priced in a 25 basis-point rate cut by the ECB on September 12, according to LSEG data.

However, ECB policymakers are increasingly at odds on the outlook for growth, with some fearing a recession and others focusing on lingering inflation pressures, sources close to the debate said.

The rate-sensitive real estate sector .SX86P was the biggest sector gainer on the STOXX 600, rising 1.8 per cent to its highest since February 2023. Morgan Stanley raised its view of European property firms to "attractive."

However, the aerospace and defence sector .SXPARO slumped over 2.4 per cent, its worst day in two months, weighed down by shares of Rolls-Royce RR.L.

The British company, the sole engine provider for Airbus' AIR.PA A350 jetliner, slumped 6.5 per cent in its worst day since May 2023 after Cathay Pacific Airways 0293.HK said it had started a fleet-wide inspection of its A350 aircraft after identifying an engine component failure. Airbus shares fell 1.4 per cent.

Among other individual movers, shares of Volkswagen VOWG_p.DE rose 1.7 per cent after the company said it was considering closing factories in Germany for the first time.

Rightmove RMV.L jumped 27 per cent after REA Group REA.AX, the property listings company majority-owned by News Corp NWSA.O, said it was considering buying the British firm.

More economic data from the region, speeches from ECB officials and U.S. payrolls data on Friday will be closely watched throughout the week.