Sell-off in defence stocks pulls down Europe's STOXX 600

The pan-European STOXX 600 index ended 0.6% down, a day after notching its strongest session in around three weeks

A sell-off in defence stocks pulled Europe's benchmark stock index down on Tuesday, while investors braced for this week's key U.S. inflation data and the ECB's monetary policy decision.

The pan-European STOXX 600 index ended 0.6% down, a day after notching its strongest session in around three weeks. Benchmark indexes in Germany, France and Italy shed between 0.9% and 1.3%.

Defence-related stocks such as Sweden's SAAB, Italy's Leonardo, Germany's Rheinmetall and Thales of France were among the top laggards on the STOXX 600, down between 4.9% and 9.8%.

A gauge of European aerospace and defence stocks plunged 3.7%, logging its sharpest one-day decline in more than a year.

Traders turned nervous about the sector's record-breaking run fuelled by growing military spending after Russia's-Ukraine conflict started in February 2022, with analysts noting potentially stretched valuations.

Caution prevailed ahead of the U.S. inflation report on Wednesday and the European Central Bank's policy decision on Thursday which could shed light on when major central banks might begin reducing interest rates this year.

Confidence in getting closer to rate reductions is rising in our view, but still data dependent and insufficient for action, wrote Bank of America analysts.

The 'meeting-by-meeting' approach means we should not expect guidance on the pace and depth of the cutting cycle, they added.

Euro zone bank shares declined 1% after an ECB survey showed lenders lowered the bar on first-quarter mortgage approvals for the first time in more than two years, but demand for credit kept falling as borrowing costs stayed high in a stagnant economy.

Daimler Truck Group shed 4% after the firm reported a 13% decline in first-quarter sales.

Biomerieux climbed 8.6% after the French diagnostics specialist published first-quarter organic growth above consensus estimates, and presented a new five-year strategic plan.