FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 27, 2025. REUTERS/staff/File Photo

By Tristan Veyet and Johann M Cherian

(Reuters) - European shares edged higher on Monday in a buoyant start to an event-filled week that is likely to be dominated by political uncertainty in France, which is all but certain to start looking for its fifth prime minister in three years.

French Prime Minister Francois Bayrou is expected to lose a vote of no-confidence vote later on Monday, at a time when the continent's second-largest economy struggles to rein in its debt. France also faces its first of many credit ratings reviews later this week.

The pan-European STOXX 600 was up 0.21% at 550.37 points, as of 0822 GMT, with France's CAC 40 index rising 0.22%.

Although the day has just started with gains, French equities have underperformed the STOXX index so far this year, pressured by rising longer-dated bond yields that have hit multi-year highs on concerns over debt-fuelled fiscal spending. [EUR/GVD]

"We think that, yes, French stocks will remain under pressure and the bonds will remain under pressure," said Swissquote Bank senior analyst Ipek Ozkardeskaya.

"But we think that the contagion risks are limited, and therefore, the European markets that would be hit by the uncertainties from France should quickly recover."

Banks led sectors higher with a nearly 1% climb, recouping some of last week's losses after weak U.S. jobs data cemented expectations that the Federal Reserve will lower interest rates by 25 basis points later this month.

European oil and gas stocks rose 0.8%, tracking a 1.6% climb in global crude oil prices. The prospect of additional sanctions on Russian crude after an overnight strike in Ukraine outweighed OPEC+'s planned output hike.

Geopolitical tensions also lifted defence stocks, with Rheinmetall rising 1.5% and the broader defence sector gaining nearly 1%.

Rising geopolitical tensions often lead investors to anticipate higher military spending or new contracts, boosting defense contractors and arms manufacturers.

On the data front, German exports unexpectedly fell in July on a sharp decline in U.S. demand due to tariffs, while industrial output climbed.

The European Central Bank will release its verdict on monetary policy on Thursday, with economists expecting no change to interest rates as inflation hovers near the central bank's target of 2% and policymakers assess the potential impact of U.S. tariffs on the euro zone economy.

On the flipside, healthcare stocks dipped 0.5%, with Novo Nordisk falling 1.3%. The U.S. Food and Drug Administration said it is tightening oversight of imports of obesity drug ingredients, citing concerns that many of the items may be adulterated and pose a safety risk.

Shares of Phoenix Group shed 5.8% after the British insurer reported half-year results and said it would rebrand as "Standard Life Plc" in March 2026.

(Reporting by Tristan Veyet in Gdansk and Johann M Cherian in Bengaluru; Editing by Sherry Jacob-Phillips)