* U.S. stocks higher in early afternoon trading
* Earnings from Morgan Stanley disappoint
* Pound supported as UK PM May wins confidence vote (Updates with European stocks’ close, U.S. stocks trading higher)
By Caroline Valetkevitch
NEW YORK, Jan 17 (Reuters) - Gains in defense shares as well as healthcare helped to keep U.S. stocks in positive territory on Thursday, while an end to the latest chapter in Britain’s exit from the European Union, Prime Minister Theresa May’s defeat of a confidence vote, lifted sterling.
S&P 500 industrials rose, led by defense contractors Lockheed Martin and Northrop Grumman , after U.S. President Donald Trump unveiled a revamped U.S. missile defense strategy.
Also among sectors with the biggest gains were materials and health care, a sector that has been a laggard this year after having outperformed all other major S&P sectors in 2018.
“Stocks have been supported this year by a lot of rebalancing that’s going on. There is a ritual in the stock market of buying what was down the most or selling what was up the most the prior year,” said John Augustine, chief investment officer for Huntington Private Bank in Cincinnati.
Those gains helped to offset declines in other areas. Morgan Stanley shares fell after it reported disappointing earnings, hot on the heels of similarly weak numbers from JPMorgan Chase earlier in the week.
Investors have also begun to worry that the U.S. government shutdown is taking a toll on the U.S. economy. White House economic adviser Kevin Hassett said the shutdown would shave 0.13 percent off quarterly economic growth for each week that it continues.
The Dow Jones Industrial Average rose 17.53 points, or 0.07 percent, to 24,224.69, the S&P 500 gained 8.52 points, or 0.33 percent, to 2,624.62 and the Nasdaq Composite added 19.31 points, or 0.27 percent, to 7,054.00.
The pan-European STOXX 600 index rose 0.04 percent and MSCI’s gauge of stocks across the globe gained 0.20 percent.
Some investors took heart from Beijing’s confirmation that Chinese Vice Premier Liu He will head to the United States on Jan. 30 for more negotiations with Washington. Recent talks to resolve a protracted trade battle between the U.S. and China brought little progress.
Adding to concerns was legislation introduced by U.S. lawmakers on Wednesday that would ban the sale of U.S. chips or other components to Huawei or other Chinese telecommunications equipment makers that violate U.S. sanctions or export control laws.
That came shortly before the Wall Street Journal reported federal prosecutors were investigating allegations that Huawei stole trade secrets from U.S. businesses.
European banks tumbled after France’s Societe Generale issued a profit warning, and carmakers skidded after U.S. Senate Finance Committee Chairman Charles Grassley said he thought President Donald Trump was “inclined” to impose tariffs on European cars.
Sterling firmed toward a two-month high against the dollar. It was last trading up 0.7 percent at $1.297.
As expected, British Prime Minister May narrowly won a confidence vote late Wednesday and invited other party leaders for talks to try to break the impasse on a Brexit agreement.
An outline for a Brexit Plan B reut.rs/2TVKYfe is due by next Monday and markets are currently assuming that with no easy way forward for May she will have to extend the date of Britain's exit from the European Union past the scheduled March 29.
“Risk assets are performing well as of late, despite what’s happening with the Brexit situation. The confidence vote was a positive step for May,” said Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis.
U.S. Treasury yields ticked up as better-than-expected economic data offset the trade tensions between China and the United States, holding down safe-haven bids for U.S. government debt.
Benchmark 10-year notes last fell 1/32 in price to yield 2.7325 percent, compared with 2.729 percent late on Wednesday.
Oil prices fell after U.S. crude production neared an unprecedented 12 million barrels per day.
Brent crude was last down $0.01 at $61.31 a barrel. U.S. crude was last down $0.27, or 0.52 percent, at $52.04 per barrel.
Additional reporting by Medha Singh and Amy Caren Daniel in Bengaluru, April Joyner in New York, and Marc Jones in London; Editing by Bernadette Baum and Steve Orlofsky