LONDON, May 28 (Reuters) - Stocks slipped from record highs on Thursday after a fresh U.S. military strike on Iran and Kuwaiti reports of missile attacks dented investor confidence in a peace deal that many see as key to easing global inflation risks.
Oil rose as much as 4% and bond prices tumbled as the escalation muddied signals on peace talks, after U.S. President Donald Trump dismissed an Iranian report of a deal to resume traffic through the Strait of Hormuz.
"Over the next two weeks, we expect either a deal for a new ceasefire, or the current ceasefire will have collapsed with active hostilities resuming," said Madison Cartwright, a senior geo-economics analyst at CBA.
He put a 70% probability on a deal, but said the fate of the strait remained uncertain.
"Insurance through the strait has become prohibitively expensive and it's unclear how and at what price insurance will be made available," he added. "It is also not clear if Iran will charge a toll, or a toll by another name."
The U.S. military said it had carried out new strikes targeting an Iranian drone operation, while Tehran said it had attacked a U.S. airbase in Kuwait.
With transits through the strait still at a trickle, Brent crude was up 2.7% at $96.8 a barrel. The price has fallen back from four-year highs above $126 in late April, but remains 33% above pre-war levels and 50% higher than a year ago.
Yields on 10-year Treasury notes were up 2 bps at 4.5%, as sustained high oil prices kept upward pressure on inflation expectations. Euro zone yields also rose, with Germany's 10-year Bund up 1 bp at 3%.
The developments also cooled this week's tech-led rally in stock markets that had pushed global indexes to new record highs.
Europe's STOXX 600 (.STOXX), was down 0.8% by midday, but was still just below February's all-time peak, while U.S. stock futures , were down 0.3% to 0.5%.
INFLATION DATA TO TEST FED
Attention now turns to U.S. personal consumption expenditures (PCE) data, which includes the Federal Reserve’s preferred inflation measure.
Higher fuel costs are expected to lift the headline PCE to a three-year high of 3.8%, while core inflation is seen rising 0.3% to an annual 3.3%, well above the Fed's 2% target.
The pick-up has prompted more Fed policymakers to call for dropping its easing bias, or even preparing for a rate hike.
The shift in Fed expectations has supported the dollar, which held at 99.506 against a basket of currencies, steady on the week.
"I know there's an awful lot of dollar bears out there, and they have been for a while. But there's always a contrarian story here. And it could just be that the dollar has a bit of a resurgence now," Trade Nation market strategist David Morrison said.
The dollar hovered near a four-week high against the yen at 159.4 , just below the 160 level that has previously triggered Japanese intervention.
The euro eased 0.2% to $1.1607 <EUR=> and is on track for a 1.1% monthly fall, though expectations of a June European Central Bank rate hike offer some support.
ECB Chief Economist Philip Lane said on Thursday policymakers must prevent the jump in energy costs feeding into broader inflation expectations.
In commodities, gold slid 1.5% to $4,390 an ounce , pressured by a stronger dollar and higher bond yields, which reduce its appeal as a safe haven.
Additional reporting by Wayne Cole in Sydney; Editing by Thomas Derpinghaus, Mark Potter and Sharon Singleton
