Oil prices rally as global stocks retreat

By Chris Prentice and Amanda Cooper

NEW YORK/LONDON, Aug 14 (Reuters) - U.S. and European shares fell on Friday and oil prices gained as markets monitored tense U.S.-Iran talks and digested new data that dented expectations for a Federal Reserve rate hike next month.

Faltering talks to end the Iran war left oil and gas prices poised for sizeable weekly gains. The U.S. threatened to ramp up economic pressure on Iran, including extending a naval blockade.

U.S. consumer sentiment deteriorated in early August amid the rising cost of living because of the Middle East conflict, a survey showed on Friday.

The U.S. dollar and yields on U.S. Treasuries fell on a surprise drop in U.S. retail sales. The data further reduced expectations of a Federal Reserve rate hike at next month's meeting.

The weaker dollar supported gold prices.

On Wall Street, the Dow Jones Industrial Average fell 85.82 points, or 0.16%, to 53,754.17, the S&P 500 fell 10.76 points, or 0.14%, to 7,788.23 and the Nasdaq Composite fell 92.60 points, or 0.34%, to 26,710.43.

In Europe, the STOXX 600 gauge retreated 0.24% as losses in the tech sector were broadly offset by gains in capital-intensive shares such as defence and automakers.

Focus remains on the broad AI theme in the wake of strong earnings that have helped soothe investor worries about massive AI spending.

The MSCI All-World index, which is up for a third straight week, reversed earlier gains and fell 0.26 points, or 0.02%, to 1,160.54.

MSCI's broadest index of Asia-Pacific shares outside Japan closed higher by 0.29% to 1,640.08.

GEOPOLITICAL RISK

"The markets round out the week on a positive note, with relatively thin event risk on the economic and corporate calendar. But of course, it’s a Friday, and the typical pattern has been for geopolitical risks, or at least bombastic rhetoric, to pick up between the U.S. and Iran going into the weekend," Capital.com strategist Kyle Rodda said.

"Currently, the geopolitical uncertainty remains the only major macro roadblock to a market experiencing strong tailwinds from earnings and the monetary policy outlook."

Brent crude futures rose to $87.68 per barrel, up 0.7% on the day, and U.S. oil prices rose 0.3% to $81.49.

John Sidawi, senior portfolio manager for fixed income at Federated Hermes, said a puzzling feature of markets in recent months has been the growing disconnect between geopolitical uncertainty and asset price volatility.

"For now, markets appear willing to tolerate a significant amount of uncertainty without demanding higher risk premiums. However, this equilibrium is unlikely to be permanent," Sidawi said.

"A meaningful escalation in conflict or a clear path toward resolution could finally force investors off the sidelines, potentially triggering a much larger volatility response than current market pricing implies."

YEN STUCK IN INTERVENTION LOOP

In currencies, the yen strengthened 0.24% against the greenback to 159.09 per dollar, after a Reuters report that the Bank of Japan could raise rates as soon as September, according to three sources familiar with policymakers' thinking.

However, it is still within sight of the 160 level that traders think could trigger another bout of yen buying from Tokyo, after a joint intervention with the U.S. last month failed to support the Japanese currency. 

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro,fell 0.39% to 99.53, with the euro up 0.47% at $1.1581.

In commodities, spot gold rose 0.85% to $4,387.41 an ounce.

(Additional reporting by Ankur Banerjee in Singapore; Editing by Sonali Paul, Alex Richardson, Emelia Sithole-Matarise and Nia Williams)