Oil prices rose on Monday spurred by brewing Middle East tensions, climbing near Friday's record high $142.99 a barrel and weighing on Asian stocks, which posted their worst first-half performance in 16 years. European stocks were expected to open lower across the board on fears inflation will gobble up returns.
Financial bookmakers in London expected Britain's FTSE 100 index to open between 11 and 15 points lower, the German DAX 9 to 13 points lower, and the French CAC 40 14 to 15 points lower.
The record breaking rally in oil prices has made stagflation - quickening inflation combined with slowing economic growth - a top fear for investors and is making analysts unhopeful about equity markets in the second half. The MSCI index of shares in the Asia-Pacific region outside of Japan was down 0.2 percent, near a three-month low plumbed on Friday. The broader pan-Asia index was largely unchanged. It is down around 14 percent so far this year, the largest first-half drop since 1992 when Japan was in a recession.
With the US dollar only able to muster a small gain in the last three months, energy markets have taken their cues from an escalating war of words between Israel and Iran, the world's fourth-largest oil exporter.
Fears about dwindling oil supply were already heightened when Libya's most senior oil official said last week he was studying the possibility of cutting output in response to US threats to sue Opec members.
"The US dollar is down and there are many high-level geopolitical news items, particularly in the Middle East, that are pushing prices up," said Mark Pervan, a senior commodities analyst at the Australian & New Zealand Bank in Melbourne. "Oil is now a very jittery and news-sensitive market that is running on rumours and concerns of future supply disruptions."
Japan's Nikkei share average, which earlier this year was viewed as a relatively safe alternative amid rising global price pressures, sputtered in June with inflation in the world's second-largest economy at the highest in a decade and export demand uncertain.
The index fell 0.5 percent on Monday and chalked up its biggest first-half decline since 1995. The index has fallen 12 percent since the start of the year. Hong Kong's Hd down by expectations the Federal Reserve will be reluctant to raise interest rates for now given continuing signs of a weak economy.