** Shares in Rheinmetall RHMG.DE rise 3%, helping Europe's aerospace & defence sector .SXPARO stabilise after a more than 22% drop from January's peaks, as Citi upgrades the German company to "buy" following a steep pullback

** Citi argues that hopes of a Ukraine peace deal and concerns over funding higher European defence spending are overdone

** "Russia will likely continue to be a threat to Europe, and Sweden and Germany are two of the few countries in Europe that can increase borrowing to fund defense increases, whereas other countries are more financially constrained," it says

** Citi lifts Sweden's Saab SAABb.ST to "neutral", shares rise 2%; Rheinmetall and Saab are down 29% and 8.5% YTD, respectively

** BofA also says the recent sector de-rating, with 12-month forward PE down about 20% in the past month, looks overdone, with valuations around 9.3 times 2029 EV/EBIT

** STOXX Aerospace & Defence .SXPARO up 0.4% after hitting a one-year low earlier; index down more than 9% this year