* HSBC set for worst day since Feb 2017
* Trade deal hopes lift auto, mining stocks
* Luxury stocks gain as LVMH bids for Tiffany (Updates prices, adds comment)
Oct 28 (Reuters) - European shares retreated on Monday as a glum profit outlook from the region's largest lender HSBC offset gains in trade-sensitive sectors buoyed by positive developments on the U.S.-China trade front.
The pan-European STOXX 600 index fell 0.2% at 0935 GMT with the banking index leading the losses.
Asia-focused lender HSBC slipped 4% to the bottom of the benchmark index after it dropped its 2020 profit target, and said it would undertake a costly restructuring as the bank struggled amidst a slowing global environment.
Another disappointment among banks was Spain's Bankia , down 3%, after the state-owned lender posted a 23% drop in third-quarter net profit as it struggles to increase margins from lending because of ultra-low interest rates.
"HSBC did cite weakness, but that's not massively unexpected given what's going on the wider growth dynamics," said Will James, senior investment director, European equities at Aberdeen Standard Investments. Defensive plays like utility and telecom stocks lost between 0.4% and 0.7% as appetite for riskier sectors rose on the day.
"Earnings have so far not been a disaster, so we are not seeing massive moves," said James. "From the ongoing underlying rotation, it appears that markets are repositioning and dumping some of those defensive stocks."
German stocks outperformed, lifting the trade-sensitive auto sector to its highest level since May.
U.S. and Chinese officials said they were "close to finalizing" some parts of a trade agreement, raising hopes that the two countries would call a truce on their long-running trade war that has roiled financial markets.
Investors will be keeping a close eye on the U.S. Federal Reserve's meeting later this week for more clarity and support from the world's biggest central bank to aid a slowing economy.
Luxury stocks stood out after Louis Vuitton owner LVMH made a bid to buy U.S. jeweler Tiffany & Co with a $14.5 billion acquisition offer.
Shares of the French luxury goods maker rose and boosted gains in peers Swatch, Pandora and Salvatore Ferragamo.
Luxury companies continue to show resilience with a host of companies beating earnings expectations last week, including Gucci owner Kering, as Chinese shoppers continue to spend heavily on luxury goods. (Reporting by Lisa Mattackal and Agamoni Ghosh in Bengaluru; Editing by Arun Koyyur)