Shares and Oil Dither, As Investors Mull Iran Risks

World shares slipped on Monday and oil prices briefly hit five-month highs before retracing gains as investors awaited possible retaliation from Iran following U.S. attacks on its nuclear sites, with fallout risks to global trade and inflation.

Markets remained restrained, with the dollar getting a modest safe-haven bid and no sign of a rush to bonds. Oil prices were up just 0.4%, after rising as much as 5.7% overnight.

"If you can keep your head when all about you are losing theirs, maybe you don't understand the situation," said Paul Jackson Invesco's global head of asset allocation research.

"Whether a lack of market reaction is naiveté, or a proper assessment of the situation, time will tell," he said.

European shares fell on Monday with the pan-European STOXX 600 index down 0.2%.

Some market participants hoped Iran might back down, with its nuclear ambitions curtailed, or even that regime change might bring a less hostile government to power there.

"That said, any sign of Iranian retaliation or threat to the Strait of Hormuz could quickly shift sentiment and force markets to reprice geopolitical risk more aggressively," said Charu Chanana, chief investment strategist at Saxo.

The Strait of Hormuz is only about 33 km (21 miles) wide at its narrowest point and around a quarter of global oil trade and 20% of liquefied natural gas supplies pass through it.

Analysts at JPMorgan cautioned that past episodes of regime change in the region typically resulted in oil prices spiking by as much as 76% and averaging a 30% rise over time.

Goldman Sachs warned prices could temporarily touch $110 a barrel should the critical waterway be closed for a month.

For now, Brent and U.S. crude were both up 0.4% at $77.32 and $74.10 a barrel, respectively. Gold also remained mostly steady at $3,365 an ounce.

RESILIENCE

World share markets looked moderately resilient, with S&P 500 futures and Nasdaq futures both up 0.2%.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9%, dragged down by shares in Taiwan which closed 1.42% lower, while Chinese blue chips closed higher 0.3% and Japan's Nikkei eased 0.1%.

Japan's manufacturing activity data on Monday showed a return to growth in June after nearly a year of contraction, but demand conditions remain.

The dollar firmed 1.25% against the yen and was last at 147.885, at its highest since May 15, while the euro dipped 0.2% to $1.1497. 

The dollar index firmed marginally to 99.339.

There was also no sign of a rush to the traditional safety of Treasuries, with 10-year yields rising about 2 basis points to 4.389%.

Markets are still pricing only a slim chance the Fed will cut rates at its next meeting on July 30, even after Fed Governor Christopher Waller broke ranks and argued for a July easing.

Most other Fed members, including Chair Jerome Powell, have been more cautious on policy, leading markets to wager a cut is far more likely in September.

At least 15 Fed officials are speaking this week, and Powell faces two days of questions from lawmakers, which will likely cover U.S. tariffs and the attack on Iran's nuclear sites. 

Among the economic data due are figures on U.S. core inflation and weekly jobless claims, along with early readings on June factory activity from across the globe.