Shares nudge up, oil dips, with Middle East and central banks in focus
The escalation in the Middle East came just as Group of Seven leaders were gathering in Canada, with U.S. President Donald Trump's tariffs already straining ties.
Iranian missiles struck Israel's Tel Aviv and the port city of Haifa on Monday, killing at least eight people and destroying homes, prompting Israel's defence minister to warn that Tehran residents would "pay the price and soon".
Yet there was no sign of panic among investors as currency markets stayed calm and Wall Street stock futures firmed after an early dip.
S&P 500 futures rose 0.6%, and Brent was last off just over 1% at $73.38 a barrel,, which analysts attributed to the fact the weekend strikes did not affect production and export facilities.
But last week's 13% surge means its inflationary impact, if sustained, could make the Federal Reserve more nervous about giving too many hints at its Wednesday meeting about interest rate cuts later in the year.
Markets are still wagering on two cuts by December, with a first move in September seen as most likely.
"The key is how much flexibility the Fed thinks it has. We've been pleasantly surprised we've not yet seen inflationary pass-through from the tariffs," said Ben Laidler, head of equity strategy at Bradesco BBI.
"The situation in the Middle East is the major issue of the day. The message from the market is that it isn't too afraid, but it does turn what was already going to be a busy week into a frenetic one, and that has a lot of people on the sidelines."
Data on U.S. retail sales on Tuesday may show a pullback in autos dragging the headline number down even as core sales edge higher. A market holiday on Thursday means weekly jobless claims figures are out on Wednesday.
For now, investors were waiting for this week's developments and MSCI's all-country world share index gained 0.2%, to sit a touch below last week's record high.
Europe's STOXX 600 rose 0.4%, led by a rebound in travel stocks after they suffered a large fall on Friday, and Gulf stocks also recovered.
Earlier in the day, Chinese blue chips added 0.5%, and Hong Kong gained 0.7% as data showed Chinese retail sales rose 6.4% in May to handily top forecasts, while industrial output was in line with expectations.
EXPOSED TO OIL
In currency markets, the dollar gave back some of last Friday's gains against European currencies - the euro was up 0.2% at $1.1571 - and held steady against the Japanese yen at 144.16.
The spike in oil prices is marginally negative for the yen and euro as both Japan and the EU are major importers of energy, while the United States is an exporter.
Currencies from oil exporters Norway and Canada both benefited, with the Norwegian crown hitting its highest since early 2023, before steadying.
"We should expect that economies with a positive energy trade balance should see their currencies benefiting from the shock to oil prices," noted analysts at Deutsche Bank.
"It's notable the dollar is in this category, highlighting how the U.S. has moved from a net energy-importer to a net exporter in recent years."
Central banks in Norway and Sweden meet this week, with the latter expected to trim rates.
The Swiss National Bank meets on Thursday and is considered certain to cut by at least a quarter point to take rates to zero, with some chance it may go negative given the strength of the Swiss franc.
The Bank of Japan holds a policy meeting on Tuesday and is widely expected to hold rates at 0.5%, while leaving open the possibility of tightening later in the year.
There is also speculation it could consider slowing the rundown of its government bond holdings from next fiscal year.
Government bond yields nudged higher around the world. The U.S. 10-year Treasury yield was last up 3 basis points at 4.45% Germany's 10-year Bund yield was up 2 bps at 2.56%.
The calmer mood across markets saw some of gold's safe-haven bid reverse and it was down 0.55% at $3,413 an ounce..
(Reporting by Wayne Cole; Editing by Sam Holmes, Alex Richardson and Tomasz Janowski)
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