A look at the day ahead in European and global markets from

Ankur Banerjee

Markets are stuck in a loop of hope and despair as talks to

end the war in the Middle East remain deadlocked, with the

latest setback sending oil prices higher, fanning inflation

worries and underpinning the dollar.

U.S. President Donald Trump said a ceasefire with Iran was

"on life support" after Tehran rejected a U.S. proposal to end

the conflict. That led to a slight risk-off mood with investors

wagering both sides would be reluctant to escalate attacks.

While a ceasefire in place since April 7 has helped lift

investor sentiment, the lack of progress in negotiations between

Washington and Tehran is beginning to weigh on certain corners

of the market.

Bond yields have been steadily rising across the globe as

investors brace for interest rates to stay higher for longer to

tackle inflationary pressure because of elevated energy prices.

In Europe, markets fully price two 25-basis point hikes

across the ECB's three meetings to September and see around a

75% chance of a third by year-end, while traders have fully

priced out any rate cuts this year from the Federal Reserve.

That has left the U.S. dollar on the front foot on

safe-haven demand, although the gains are constrained as

investors still pin hopes on some sort of resolution in the

coming days.

U.S. inflation data later in the day will take centre stage

as investors parse the report to get a sense of the impact of

the war on prices. The final inflation data for April in Germany

is also due after an early report showed a rise in prices.

That data may sharpen focus on just how vulnerable

energy-dependent Europe remains, especially with the pivotal

Strait of Hormuz effectively shut down 10 weeks into the

conflict.

Futures point to a lower open as the dour mood

moves to Europe, with the pan-European STOXX 600 still

trading about 4% below pre-war levels and lagging global peers

that have rebounded on artificial intelligence-driven optimism.

Key developments that could influence markets on Tuesday:

* Germany: April inflation report, May ZEW sentiment survey

* U.S.: Inflation report