- Oil prices rise as U.S. strikes in Iran dampen peace hopes
- ECB's Isabel Schnabel signals need for rate hike, whether or not there is Iran peace deal
- European bond yields rise, German 10-year yield still near seven-week low
PARIS, May 26 (Reuters) - European stock indexes gave up some recent gains on Tuesday and oil prices rose after new U.S. strikes in southern Iran dampened investors' hopes that a U.S.-Iran peace deal could be imminent.
Market sentiment had turned more positive over the past week as traders bet on a de-escalation in the U.S.-Israel war on Iran, which has severely disrupted Middle East oil and gas supplies since it began in late February.
But they readjusted this view on Tuesday after the U.S. said on Monday it had carried out what it called defensive strikes in southern Iran. As talks continue, U.S. Secretary of State Marco Rubio said on Tuesday negotiating a deal with Iran could "take a few days".
At 1051 GMT, the STOXX 600 was down 0.2% on the day, but still close to its highest since the war began. London's FTSE 100 was up 0.7% on the day, while Germany's DAX was down 0.5%. The MSCI World Equity Index was flat, but up 3.8% so far this month.
Peter Schaffrik, global macro strategist at RBC Capital Markets, said that uncertainty in the Middle East was weighing on markets.
"It went from agreement is near to everyone needs to sign the Abraham Accords to bombing, so it’s not entirely clear what’s going on there," he said, referring to U.S. President Donald Trump saying on Monday he had told additional countries to sign the Abraham Accords as he tried to negotiate an agreement to end the war.
Still, Wall Street futures pointed to more gains for stocks in the U.S. session, with S&P 500 e-minis up 0.7% and Nasdaq e-minis up 1.1% on the day .
Oil prices rose, with Brent crude futures up 2.4% on the day at $98.50 a barrel . U.S. West Texas Intermediate was down 4.7% from Friday's close at $92.04. There was no WTI settlement on Monday due to the U.S. Memorial Day holiday.
Still, there was some underlying optimism in the market, Schaffrik said, as traders held on to hope that the Strait of Hormuz could reopen to traffic soon. Brent crude has come down significantly from its late April peak above $120.
European traders were also weighing up comments by European Central Bank board member Isabel Schnabel, who told Reuters that the central bank should raise interest rates in June even if ongoing peace talks with Iran yield a deal.
The conflict has been far longer than projected and high energy prices are spilling into the broader economy, she said.
Money market traders are pricing in about a 90% chance of a hike at the ECB's June meeting.
European bond yields rose following the U.S. strikes, but the benchmark 10-year German yield was still close to its lowest in almost seven weeks at 2.9642% .
Yields fell last week as investors became less concerned about the war's impact on inflation and growth. U.S. government bonds rallied as investors were still hopeful about a deal to re-open the Strait of Hormuz.
The U.S. dollar was steady, with the dollar index at 99.026 and the euro flat on the day at $1.1642 . The dollar was up 0.1% against the Japanese yen at 159.12 yen .
Gold was down around 0.8% on the day at $4,534.86 .
Reporting by Rae Wee; Editing by Muralikumar Anantharaman, Sharon Singleton and Jan Harvey
Source: Reuters