*

Defence stocks lead gains

*

Volkswagen dips as MS downgrades to 'under-weight'

*

Banks pressure Italian shares

(Updated at 1600 GMT)

By Sruthi Shankar and Johann M Cherian

May 20 (Reuters) - European shares ended marginally

higher on Monday, with defence stocks in the lead, but gains

remained in check as investors awaited economic data against an

uncertain backdrop on the outlook for interest rate cuts.

The pan-European STOXX 600 index edged up 0.1%

closing a nudge below record highs hit last week. The aerospace

and defence sector led sectoral gains with a 1.9%

rise.

The technology sector climbed 0.8% in the lead up to

Artificial Intelligence bellwether Nvidia's ( NVDA )

first-quarter results expected later in the week out of the U.S.

Limiting gains on equities, euro zone sovereign bond yields

climbed for the second day, with markets awaiting fresh eurozone

business activity data later in the week, which could provide

clues on the European Central Bank's monetary path.

"The fact that inflation is likely to fall below 2%

temporarily after the summer suggests that a majority of ECB

policymakers feel that it is safe to start easing policy in June

before re-assessing the inflation outlook and possibly pausing

in the autumn," analysts at Societe Generale said in a note.

Late last week board member Isabel Schnabel said in an

interview with Nikkei that the ECB may slash interest rates in

June, but should be cautious about further cuts in borrowing

costs given uncertainty over the outlook.

Markets are pricing in around 65 basis points (bps) of ECB

rate cuts in 2024, as per LSEG's rate probabilities app,

compared with 67 bps on Friday.

The STOXX 600 index started the month of May with a nine-day

winning streak that culminated in a record-high, and while the

outlook for interest rates remains cloudy, analysts have

highlighted further gains are on the horizon once the ECB's

monetary easing cycle kicks in.

Italian stocks slid 1.6%, with banks such as Banca

Popolare di Sondrio and Banco BPM among the

top decliners.

Among others, Volkswagen dipped 1.7% after

Morgan Stanley downgraded the automaker to "under-weight" from

"equal-weight" and turned cautious on German carmakers overall,

pointing to shrinking margins and the potential for trade

disputes.

Airbus added 1.2% after Saudia Group, owner of

the Saudia airline and budget carrier flyadeal announced an

order for 105 narrow-body aircraft

in what the company's director general described as the

largest ever order from a Saudi airline.

Miners climbed about 0.7%, as copper prices

surged to record highs helped by China's property support

measures and better-than-expected industrial data, while bullion

prices also hit fresh peaks.

Stock markets in Switzerland, Sweden and Denmark were closed

for Whit Monday holiday.