Asian Markets Cautious as Gulf Conflict Keeps Oil Elevated

Asian shares traded in a narrow range on Monday, with investors closely watching oil markets that have been buoyed by the ongoing conflict in the Gulf region. The lack of progress toward ending the Iran war has kept inflation risks elevated, with peace talks and oil tanker traffic through the Strait of Hormuz remaining halted.

Brent crude held steady at $88.50 a barrel after gaining 6% last week, while U.S. crude slipped 0.3% to $82.12, following a 5.4% weekly rise. The conflict has also had broader regional consequences, with reports of deadly Israeli strikes in southern Lebanon over the weekend.

"While there is still no resolution to the Iran/Hormuz impasse, our base case remains that oil prices will stay in a $70-$100 range," said Shane Oliver, chief economist at AMP. He noted the risk of a sustained disruption to Middle East oil flows, which are currently down 10%-15% from normal levels.

MSCI's broadest index of Asia-Pacific shares outside Japan was flat, while Japan's Nikkei edged 0.4% higher. Australia's resources-heavy shares slipped 0.3%. South Korean markets were closed for a public holiday.

Investors are now awaiting China's July activity data, with forecasts pointing to a slowdown in industrial output growth to 4.8% from 5.3% previously. Retail sales are expected to have risen 1.5%.

In Europe, EUROSTOXX 50 futures rose 0.2%, while S&P 500 and Nasdaq futures gained 0.1% and 0.2% respectively. The recent bullish run in stocks has been supported by diminishing expectations that the Federal Reserve will raise interest rates next month, now seen as a 69% probability after a slew of soft economic data.

U.S. retail sales posted their first decline in nine months in July, and consumer sentiment soured more than expected, adding to soft inflation readings. This week's key data point will be the August S&P Purchasing Managers' Indices, with earnings from major retailers like Home Depot, Target, and Walmart also in focus.

In bond markets, U.S. Treasury yields slipped on Monday, with the two-year yield falling 2 basis points to 4.156% and the ten-year yield down 1 basis point to 4.684%. The soft data has weighed on the dollar, with the euro up 0.1% at $1.1578. Gold held at $4,381 an ounce, having climbed 0.8% last week.