San Francisco Frontiers - Stocks rise, oil dips as markets assess Israel-Hamas conflict

Europe's main stock markets closed with gains of around two percent, and after a largely upbeat session in Asia.

Wall Street stocks pushed higher, adding to gains posted on Monday, with a fall in bond yields supporting equities.

Oil prices dropped, having soared Monday after Palestinian militant group Hamas unexpectedly launched a deadly attack on Israel over the weekend, stoking fear of spreading unrest in the crude-rich Middle East.

"Equity markets are bouncing back on Tuesday after a risk-averse start to the week," said analyst Craig Erlam at trading firm OANDA.

He added that markets were buoyed by "some promising Fed commentary."

"It would appear the recent surge in bond yields hasn't gone unnoticed at the central bank, to the extent that Fed officials are coming across as less hawkish in their views," Erlam said.

Yet traders remained on edge as Israel carried out retaliatory attacks in Gaza.

Middle East tensions have typically not had a lasting impact on the markets, said Karl Haeling of LBBW.

While there could be disruptions to oil prices, he added, a key factor is whether the war escalates.

Claims that Tehran helped Hamas plan the raids have stoked fears that Israel will hit major crude producer Iran, which would cause a major escalation and likely send prices higher.

Iran has denied the claims while the United States said Tuesday it has no evidence of direct Iranian involvement.

Oil prices dropped on Tuesday.

"Markets are attempting to understand how the situation in Israel will now unfold and critically whether other states will explicitly weigh in," said CMC Markets analyst Michael Hewson.

- 'Goldilocks' scenario -

Despite simmering geopolitical tensions, sentiment was helped by Friday's forecast-busting US jobs report that also showed wage gains slowing.

This marks a so-called "Goldilocks" scenario in which the data was neither too weak nor too strong.

The upbeat mood was boosted Monday after Fed Vice Chair Philip Jefferson said the recent spike in US Treasury yields to multi-year highs could provide the necessary restraint on credit that would be achieved by higher interest rates.

"Looking ahead, I will remain cognisant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy," he told a conference.

His comments echoed those of Dallas Fed President Lorie Logan, who suggested that if bond market costs were on the rise, that "could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening".

- Key figures around 2115 GMT -

New York - Dow: UP 0.4 percent at 33,739.30 points (close)

New York - S&P 500: UP 0.5 percent at 4,358.24 (close)

New York - Nasdaq: UP 0.6 percent at 13,562.84 (close)

London - FTSE 100: UP 1.8 percent at 7,628.21 (close)

Frankfurt - DAX: UP 2.0 percent at 15,423.52 (close)

Paris - CAC 40: UP 2.0 percent at 7,162.43 (close)

EURO STOXX 50: UP 2.3 percent at 4,205.23 (close)

Tokyo - Nikkei 225: UP 2.4 percent at 31,746.53 (close)

Hong Kong - Hang Seng Index: UP 0.8 percent at 17,664.73 (close)

Shanghai - Composite: DOWN 0.7 percent at 3,075.24 (close)

Euro/dollar: UP at $1.0609 from $1.0567 on Monday

Dollar/yen: UP at 148.68 yen from 148.51 yen

Pound/dollar: UP at $1.2281 from $1.2238

Euro/pound: DOWN at 86.32 pence from 86.34 pence

Brent North Sea crude: DOWN 0.6 percent at $87.65 per barrel

West Texas Intermediate: DOWN 0.5 percent at $85.97 per barrel

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