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S&P 500, Dow indexes trade higher

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Nikkei slips as yen climbs

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Markets imply nearly 40% chance Fed cuts by 50 bps

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Oil gains as Libya shuts production, Israel-Hezbollah spar

(Updates lede, headline and prices throughout with U.S. market

open)

By Chibuike Oguh and Dhara Ranasinghe

NEW YORK/LONDON, Aug 26 (Reuters) - World stock markets

edged higher on Monday buoyed by optimism that U.S. interest

rates are likely to be lowered soon even as oil prices jumped

amid increased tensions in the Middle East.

The benchmark S&P 500 index and the Dow traded

higher, European shares climbed, and trading was

subdued with the London market closed for a UK public holiday.

Japan's blue-chip Nikkei stock index closed down almost 0.7%

as the yen firmed.

The Dow Jones Industrial Average rose 0.47% to

41,367.08, the S&P 500 gained 0.11% to 5,641.02 and the

Nasdaq Composite lost 0.21% to 17,840.46. MSCI's gauge

of stocks across the globe rose 0.13% to

832.39.

Israel and Hezbollah traded rocket salvos and airstrikes on

Sunday, stirring worries about possible oil supply disruptions

if the conflict escalated. Crude prices were also buoyed by

Libya's eastern-based government announcement of the closure of

all oil fields on Monday, which halted production and exports.

Both Brent and U.S. crude prices rose more

than 3%, with Brent trading up 3.11% to $81.48 per barrel and

West Texas Intermediate adding 3.59% to $77.52 per barrel.

In a highly-anticipated speech to the Jackson Hole symposium

on Friday, Federal Reserve chief Jerome Powell said the time had

come to start easing policy and emphasised the central bank did

not want to see further weakening in the labour market.

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

was not yet assured.

"Comparing the Fed to the ECB, the Fed is more focused on

the labour market and whether it has tightened too much," said

David Kohl, chief economist at Julius Baer in Frankfurt.

The yield on benchmark U.S. 10-year notes rose

0.7 basis points to 3.814%. The two-year note yield,

which typically moves in step with interest rate expectations,

rose 0.8 basis points to 3.921%.

Fed fund futures are fully priced for a

quarter-point cut at the Sept. 18 meeting, and imply a 38%

chance of a 50 bps move. The market also has 103 bps of easing

priced in for this year and another 122 bps in 2025.

The ECB has already started cutting rates, with a 25 bps

reduction in July, with a further two quarter point reductions

priced in by year-end.

NVIDIA AWAITED

In share markets, focus was already turning to the latest

earnings from AI star Nvidia ( NVDA ), which reports on

Wednesday to sky-high market expectations.

The stock is up some 160% year-to-date, accounting for

around a quarter of the S&P 500's 18% year-to-date gain.

"Nvidia ( NVDA ) will beat consensus expectations, they always do,

but investors are so ingrained in seeing revenue come in $2

billion-plus above the analysts' consensus or we could easily

see a sell-the-news event," said Chris Weston, head of research

at broker Pepperstone.

That means Nvidia ( NVDA ) would have to report sales of $30 billion

or more and guidance for the third quarter of $33 billion or

above, he added.

Also in focus are U.S personal consumption and core

inflation data due on Friday, along with a flash reading on

European Union inflation. Analysts generally assume the data

will be benign enough to allow for rate cuts in September.

The dollar fell to a three-week low at 143.45 yen. It was

last down around 0.03% at 144.32 yen, having fallen

1.3% on Friday. The euro edged down 0.28% to $1.1159,

but remained just off a 13-month top. The British pound sterling

weakened 0.14% at $1.319.

Gold prices firmed, nearing the recent record high on

safe-haven demand. Spot gold added 0.27% to $2,517.22 an

ounce. U.S. gold futures gained 0.29% to $2,515.70 an

ounce.