(Updates to Asia afternoon)

* Equities rebound as investors gird for earnings test

* Rising Middle East tensions keep oil prices near 1-month

high

* Inflation worries buoy yields, rate hike wagers

By Ankur Banerjee

SINGAPORE, July 21 (Reuters) - Asian stocks snapped a

three-day losing streak on Tuesday as oil prices retreated from

a one-month high on mediation efforts in the Middle East, and

investors braced for corporate earnings that will test an

under-pressure AI trade.

Yemen's Iran-aligned Houthis said they would impose a naval

blockade on Saudi Arabia, a move that could further disrupt

energy supplies, amid increased attacks between the U.S. and

Iran, even as efforts were being made to revive a fragile

ceasefire.

A senior Iranian official told Reuters on Monday that Tehran

had received a proposal from mediators for a 10-day ceasefire,

intended to pave the way for a lasting agreement to end the war

that began on February 28 with U.S.-Israeli attacks on Iran.

Brent crude futures eased 0.74% to $88.56 per barrel on

Tuesday as investors latched on to hopes of a resolution. Brent

hit a one-month high of $91.42 a barrel in the previous session.

"I think we've got a really strange situation that investors

are still trying to look at things with a glass half full view,

as we've seen this all before a few months ago and want the same

outcome," said Nick Twidale, chief market strategist at ATFX

Global in Sydney.

Twidale said concern that things could get out of hand and the

conflict escalate across the region had to be growing. "Feel we

might see one catalyst that pops things and then we are off to

the races," he said.

In stocks, MSCI's broadest index of Asia-Pacific shares outside

Japan was up more than 2% after dropping for

three straight sessions. Japan's Nikkei gained nearly 3%

while South Korea's KOSPI rose 4.5%.

"This looks more like a relief rally than an all-clear signal,"

said Charu Chanana, chief investment strategist at Saxo. "The

rebound can continue if oil stays contained and tech earnings

validate AI spending, but both assumptions remain fragile."

U.S. stock futures rose sharply while European

futures were down 0.2%, indicating a muted open.

Global stocks, led by chipmakers, have been hit by severe

volatility in recent weeks as investors fret about high

valuations, profit growth and whether the investment in AI

infrastructure will yield tangible results.

AI'S EARNINGS TEST

Investor focus this week will be on earnings from companies

including Alphabet and Intel ( INTC ) to gauge the

impact of the war and whether the AI trade has more room to run

given sky-high profit expectations for the second quarter.

Strong earnings from Asian chip bellwethers Samsung

Electronics ( SSNLF ) and TSMC in recent weeks were

not enough to satisfy investor expectations, underscoring the

challenge facing the industry.

"While demand for AI hardware remains red-hot, with

companies barely able to keep up supply, investor expectations

for earnings have become increasingly lofty, rendering the

sector vulnerable even to a marginal adjustment in projections,"

said Fred Neumann, chief Asia economist at HSBC in Hong Kong.

"The economic backdrop is becoming more challenging as well,

with rising energy prices and higher interest rates complicating

the outlook and showing that even the AI hardware sector is not

entirely immune to such broader developments," Neumann said.

Escalating U.S.-Iran tensions have revived inflationary worries

and pushed Treasury yields higher. The 2-year note

yield, which typically moves in step with Federal Reserve

interest-rate expectations, was at 4.206% in Asian hours after

gaining 4 basis points on Monday.

Traders are pricing in 33 basis points of interest rate

increases this year.

The dollar was steady against most major currencies

supported by safe-haven flows. The euro last bought

$1.14145, while the Japanese yen was at 162.51 per

dollar, keeping traders on alert for intervention from Tokyo.

Sterling was nursing losses after comments from Andy

Burnham, Britain's seventh prime minister in a decade, spooked

investors over his fiscal policy. It was last at $1.344.

Burnham said he would stick to the previous government's fiscal

rules though he would use any flexibility within them.