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S&P 500, Nasdaq indexes trade lower

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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 and prices throughout, adds analyst comment)

By Chibuike Oguh and Dhara Ranasinghe

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

edged lower on Monday as markets digested the likelihood of U.S.

interest rates being lowered soon, even as oil prices jumped

amid increased tensions in the Middle East.

The benchmark S&P 500 index and the Nasdaq

gave up early gains and traded lower, while the Dow

climbed. European shares finished slightly down, with

trading subdued in the London market, which is closed for a

public holiday. Japan's blue-chip Nikkei stock index closed down

almost 0.7% as the yen firmed.

The Dow Jones Industrial Average rose 0.07% to

41,205.49, the S&P 500 lost 0.30% to 5,617.52 and the

Nasdaq Composite lost 0.79% to 17,736.98. MSCI's gauge

of stocks across the globe fell 0.18% to

829.87.

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.

Brent crude traded up 2.7% to $81.15 per barrel and

West Texas Intermediate rose 3.18% to $77.21 per barrel.

"The market is digesting a lot of news: obviously there

was a rally on Friday on (Federal Reserve Chair Jerome) Powell's

comments and we thought durable goods orders come in good," said

Ben McMillan, principal and chief investment officer at IDX

Insights in Tampa, Florida.

"Historically rate cuts have actually preceded equity

market weakness because rates are being cut for a reason."

New orders for long-lasting, U.S.-made goods,

items ranging from toasters to aircraft meant to last three

years or more, surged by 9.9% last month, marking a solid

rebound from a decline in June and beating analyst expectations,

Commerce Department data showed.

In a highly-anticipated speech to the Jackson Hole

symposium on Friday, 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.

European Central Bank chief economist Philip Lane struck a

more cautious note in his Jackson Hole speech, saying the

central bank was making "good progress" in cutting euro zone

inflation back to its 2% target, but success was not yet

assured.

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

0.3 basis points to 3.81%. The two-year note yield,

which typically moves in step with interest rate expectations,

rose 1 basis point to 3.9231%.

Fed fund futures are fully priced for a

quarter-point cut at the September 18 meeting, and imply a 39.5%

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.

"I think it's more likely than not that we're going to see

75 bps cut this year. And the market has some potential

readjustment for less rate cuts than is being priced in,"

McMillan said.

NVIDIA AWAITED

Investors are also eyeing the latest earnings from AI

powerhouse 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.

"The big thing this week is really Nvidia ( NVDA ) more than any of

the macro stuff. I think folks are really focused on Nvidia ( NVDA )

because that's been kind of the bellwether for the risk-on trade

this year," McMillan 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 Japanese yen rose to a three-week high against the U.S.

dollar, while the greenback rallied from an eight-month low. The

dollar dropped to a three-week low against the yen of 143.45

but pared losses and was last slightly up 0.08% at

144.5.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

gained 0.18% at 100.84, with the euro down 0.21% at

$1.1167.

Gold prices firmed, nearing the recent record high on

safe-haven demand. Spot gold rose 0.14% to $2,513.79 an

ounce. U.S. gold futures gained 0.28% to $2,515.50 an

ounce.