Rate-cut hopes meet Mid-East risks

A look at the day ahead in U.S. and global markets by Dhara Ranasinghe.

Not for the first time, financial markets are reminded why it's never a good idea to get too far ahead.

So, while Federal Reserve chief Jerome Powell's much-awaited Jackson Hole speech on Friday fueled the rate-cut optimism that has aided stocks' recovery from the early-August rout, the latest Middle East news highlights the need for caution.

Hezbollah launched hundreds of rockets and drones at Israel early on Sunday, as Israel's military said it struck Lebanon with around 100 jets to thwart a larger attack, in one of the biggest clashes in more than 10 months of border warfare.

Any major spillover in the fighting, which began in parallel with the war in Gaza almost a year ago, risks morphing into a regional conflagration drawing in Hezbollah's backer Iran and Israel's main ally the United States.

Iran's foreign minister was reported saying the country does not seek to increase Middle East tensions. Still, a rise of more than 1% in oil prices suggests some unease among investors that regional oil supplies could face disruption.

A full read out of the mood music is difficult with London markets closed for a public holiday.

Still, European shares are flat, as are U.S. stock futures, while Japan's blue-chip Nikkei closed the Asia session down almost 0.7%.

JACKSON HOLE

The more hesitant tone in world markets follows a fresh surge in optimism that a U.S. rate cutting cycle is likely to begin in September.

In highly anticipated comments before the Jackson Hole Economic Symposium, Fed boss Powell said "the time has come" to lower the Fed funds target rate, and "the upside risks of inflation have diminished."

For sure, the data-dependent Fed will have a raft of economic indicators to consider ahead of its September meeting, including this week's revised second-quarter GDP and the broad-ranging Personal Consumption Expenditures (PCE) report, which includes the Fed's preferred inflation yardstick, the PCE price index.

But these would have to deliver major surprises to shake the market's view that a rate decrease -- of at least 25 basis points -- is coming.

Also speaking at Jackson Hole, European Central Bank chief economist Philip Lane struck a more cautious note at the weekend, saying the central bank was making "good progress" in cutting euro zone inflation back to its 2% target but success is not yet assured.

All this has left the dollar languishing at three-week lows versus the yen. The euro and British pound were a tad lower on the day but holding near multi-month peaks hit against the greenback on Friday.

Key developments that should provide more direction to U.S. markets later on Monday:

* German August Ifo index falls in August.

* U.S. July durable goods due out.

(Reporting by Dhara Ranasinghe; Editing by Toby Chopra)