GLOBAL MARKETS-Stocks climb as oil prices back off earlier gains

Updates with close of European markets

By Chuck Mikolajczak

NEW YORK, March 17 (Reuters) - Global stocks rose on Tuesday for a second straight session, even as the war in Iran continued to drive up oil prices and ahead of a flurry of policy announcements from global central banks this week.

Israel said it had killed Iran's security chief, while a senior Iranian official said the new supreme leader had rejected de-escalation offers conveyed by intermediaries.

President Donald Trump told reporters the U.S. was not ready to leave the military operation in Iran yet, but that "we'll be leaving in pretty much the very near future".

U.S. crude CLc1 rose 2.28% to $95.63 a barrel and Brent LCOc1 climbed 2.59% to $102.81 per barrel, supported by Iranian attacks on the United Arab Emirates that kept supply fears intact while the Strait of Hormuz remains largely shut. Both contracts were off earlier gains of about 5%, but remain up more than 40% for the month.

MAJOR S&P SECTORS ADVANCE

On Wall Street, U.S. stocks were higher, led by a 1.4% rise in the S&P 500 energy index .SPNY. Despite rising fuel costs, airline and travel stocks also advanced after Delta Air DAL.N and American Airlines AAL.O flagged strong spring demand.

"The consumer and market are not as worried about inflation right now as they were maybe a week ago. I think we're starting to see the forest through the trees where this war is not going to last forever," said Dennis Dick, founder at Triple D Trading.

The Dow Jones Industrial Average .DJI rose 137.81 points, or 0.29%, to 47,083.55, the S&P 500 .SPX gained 27.45 points, or 0.40%, to 6,726.24 and the Nasdaq Composite .IXIC climbed 119.96 points, or 0.53%, to 22,493.75.

MSCI's gauge of stocks across the globe .MIWD00000PUS rose 6.47 points, or 0.63%, to 1,014.53 and was on track for its first back-to-back daily gains in three weeks, while the pan-European STOXX 600 .STOXX closed up 0.67%, buoyed by energy .SXEP and utilities .SX6P stocks.

Stocks have struggled since the war in Iran started. HSBC global equity strategist Alastair Pinder said in a note that while "talk of a shift toward stagflation is building" the recent action in equity markets "is more indicative of trading for a recessionary outcome."

The jump in oil prices and its potential to boost inflation have prompted markets to adjust expectations for easing by global central banks this year.

Markets are pricing in about 27 basis points of cuts from the U.S. Federal Reserve by year-end, down from more than 50 basis points earlier this week, and roughly 35 basis points of hikes from the European Central Bank after pricing in a modest chance of a cut as recently as February, according to LSEG data.

While investors were largely not pricing in any cuts from the Fed at Wednesday's policy announcement, the timing of any future reductions has been pushed further out this year.

Operations at the UAE's Shah gas field remained suspended on Tuesday, while a new attack caused a fire in the key oil export terminal of Fujairah, highlighting how Iran is disrupting energy flows from the region.

Stock markets rallied on Monday as oil prices dipped on hopes shipping flows from the Gulf would improve and optimism about artificial intelligence lifted U.S. tech companies.

CENTRAL BANKS GRAPPLE WITH ENERGY PRICES

The Reserve Bank of Australia voted on Tuesday to hike interest rates for a second straight month, taking its benchmark rate to 4.1% and warning of a material inflation risk from the Middle East war.

Goldman Sachs analysts said the risk of a third straight hike is "material" but not their base case.

The move set the tone ahead of policy statements this week from central banks in the U.S., Britain, euro zone, Japan, Canada, Switzerland and Sweden, all of which will meet for the first time since the start of the Iran war. Investors will look for clues on how higher crude prices could influence the rate outlook.

The Fed is widely expected to hold rates steady, and policymakers are likely to strike a cautious, if not hawkish, tone due to the current oil shock.

The shifts in central bank expectations have led to large moves in government bonds, although that market was subdued on Tuesday.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 2.2 basis points to 4.198% but is up about 24 basis points for March. The two-year note US2YT=RR yield, which typically moves in step with Fed rate expectations, fell 1.5 basis points to 3.665% but is up nearly 29 basis points for the month.

The dollar index =USD, which measures the greenback against a basket of currencies, shed 0.3% to 99.56, with the euro EUR= up 0.31% at $1.1539.

Against the Japanese yen JPY=, the dollar weakened 0.06% to 158.97, just below the key 160 level that has previously triggered interventions by the Bank of Japan, despite verbal warnings from Japanese authorities on Tuesday.

(Reporting by Chuck Mikolajczak in New York, additional reporting by Harry Robertson in London, Gregor Stuart Hunter in Singapore, Johann M Cherian and Utkarsh Hathi in Bengaluru; Editing by Pooja Desai, Rod Nickel and Mark Potter)

((charles.mikolajczak@tr.com; @chuckmik.bsky.social))