GLOBAL MARKETS: Asia shares take a breather as Gulf hostilities drag on

Asian shares turned hesitant on Thursday as news of a fresh U.S. military strike in Iran challenged investor optimism on a near-term peace deal, while U.S. inflation data loomed as a threat for bonds and interest rates.

Oil prices bounced 2% and Treasury yields edged higher as the strike added to the conflicting signals over the talks after President Donald Trump dismissed an Iranian report of a deal to restore traffic through the Strait of Hormuz.

"Over the next 2 weeks, we expect either a deal for a new ceasefire, or the current ceasefire will have collapsed with active hostilities resuming," said Madison Cartwright, a senior geo-economics analyst at CBA.

He put a 70% probability on a deal being agreed, while cautioning that the fate of the strait was up in the air.

"Insurance through the strait has become prohibitively expensive and it's unclear how and at what price insurance will be made available," he added. "It is also not clear if Iran will charge a toll, or a toll by another name."

With transits of the strait still only at a trickle, Brent crude rebounded 2.3% to $96.50 a barrel, while U.S. crude CLc1 added 2.2% to $90.59. O/R

Yields on 10-year notes US10YT=RR edged up 2 basis points to 4.502% as the risk of oil staying high kept upward pressure on inflation expectations.

It also took a little steam out of the tech-driven bull run in stock markets, with Japan's Nikkei .N225 easing 0.2%, while South Korean shares .KS11 went flat. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dipped 0.1%.

Reports from Japan suggested the government planned to issue "bridging bonds" to fund flagship programmes aimed at boosting investment in growth and economic security.

For Europe, EUROSTOXX 50 futures STXEc1 and DAX futures FDXc1 both slipped 0.2%, while FTSE futures FFIc1 lost 0.3%. S&P 500 futures ESc1 and Nasdaq futures NQc1 added 0.1%.

INFLATION DATA TO TEST FED

The focus now shifts to U.S. data on personal consumption expenditures (PCE), which include the Federal Reserve's preferred measures of inflation.

The pulse from fuel is expected to lift the headline PCE to a three-year high of 3.8%, while the core is forecast to rise 0.3% to an annual 3.3% and far above the Fed's 2% target.

The pick-up has led more Fed members to call for dropping its easing bias, or even preparing for a rate hike.

"With inflation well above target but the growth impact of the conflict still uncertain, the Fed faces genuine two-sided risk," argued analysts at NAB in a note.

"We see that uncertainty as the argument for holding rates through end-2027, whereas a firming in services core inflation would sharpen the case for higher-for-longer and a sharp moderation would shift attention to the emerging growth headwinds."

Markets imply a 50-50 chance of a quarter-point rise in the funds rate to a range of 3.75-4.0% by year-end. 0#USDIRPR

The shift in Fed expectations has helped underpin the U.S. dollar, which was trading at 99.291 =USD against a basket of currencies to be steady on the week.

The dollar crept to a four-week top on the yen at 159.57 JPY=EBS, nearing the 160.00 barrier that has triggered Japanese forex intervention in the past.

The euro was a shade lower at $1.1620 EUR=EBS, though it has support from expectations the European Central Bank will hike interest rates when it meets in June. 0#EURIRPR

Speaking on Thursday, ECB Chief Economist Philip Lane emphasised the importance of preventing the spike in energy costs from feeding into higher inflation expectations.

In commodity markets, gold eased 0.3% to $4,445 an ounce XAU=, having again seen scant support as a safe haven or as a hedge against inflation risks. GOL/

-Wayne Cole/Reuters