SYDNEY: Asian markets kept their nerve on Monday and oil prices climbed anew as the conflict between Israel and Iran showed no sign of cooling, adding geopolitical uncertainty to the world's economic troubles in a week packed with central bank meetings.
The escalation came just as Group of Seven leaders were gathering in Canada with US President Donald Trump's tariffs already straining ties.
Yet there was no sign of panic among investors, with currency markets calm and Wall Street stock futures steadying after an early dip.
Oil did add one per cent to last week's 13 per cent surge in an inflationary pulse that, if sustained, should make the Federal Reserve even less likely to cut interest rates when it meets on Wednesday.
Futures imply almost no chance of a reduction in the 4.25 to 4.50 per cent rate band, and scant prospect of a move in July either. Markets will be particularly sensitive to any change in the Fed's "dot plot" path for rates.
"The Committee will release a new set of economic forecasts, and we expect that the interest rate forecast 'dots', which last showed a median expectation of two cuts this year, will instead look for only one cut this year," said Michael Feroli, head of US economics at JPMorgan.
Markets are still wagering on two easings by December, with a first move in September seen as most likely.
Data on US retail sales on Tuesday will also be a hurdle, as a pullback in autos could drag the headline 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 on developments and MSCI's broadest index of Asia-Pacific shares outside Japan edged up zero point one per cent.
Japan's Nikkei firmed zero point eight per cent and South Korean stocks added zero point five per cent.
Chinese blue chips added zero point one per cent as data showed retail sales rose 6.40 per cent in May to handily top forecasts, while industrial output was in line with expectations.
S&P 500 futures rose zero point one per cent and Nasdaq futures gained zero point two per cent, recovering from an early dip.
Exposed to oil
European markets were more pressured by the region's reliance on oil imports and EUROSTOXX 50 futures slipped zero point two per cent, while DAX futures lost zero point three per cent. FTSE futures were little changed.
Yields on 10-year Treasuries were a shade higher at 4.41 per cent, showing little sign of safe haven demand.
In currency markets, the dollar firmed zero point two per cent on the Japanese yen to 144.39, while the euro dipped zero point one per cent to US$1.1530. The spike in oil prices is a negative for the yen and euro at the margin 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.
"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 US 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 thought likely 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 0.50 per cent, 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.
In commodity markets, gold was getting the safe-haven bid from Mid-East tensions and rose zero point five per cent to US$3,450 an ounce.
Oil prices were underpinned by fears the Israeli-Iran conflict could spread and disrupt exports from the region, particularly through the vital Strait of Hormuz.
Brent climbed 72 cents to US$74.95 a barrel, while US crude rose 84 cents to US$73.82 per barrel.