Hesitation dominated the markets, with crude prices supported by the looming deadline for a potential pact, keeping many investors on the sidelines. Iran stated it seeks a lasting end to the conflict rather than a temporary ceasefire, and rejected pressure to reopen the Strait of Hormuz, through which approximately one-fifth of the world's oil and natural gas supply flows.
In recent hours, U.S. President Donald Trump warned that Iran could be "obliterated" if it failed to meet his deadline for a deal (0000 GMT Wednesday). He pledged to destroy Iranian power plants and bridges, downplaying concerns over whether such actions might constitute war crimes.
Both sides have exchanged threats, strikes, and insults after Iran rejected a ceasefire proposal, maintaining its demand for a stable resolution to the conflict that has kept the maritime route closed and upended global markets and economies.
While investors have pinned their hopes on a resolution, talks have so far failed to bear fruit, as the war fuels fears of stagflation -- high inflation coupled with weak or sluggish growth.
Furthermore, this scenario has disrupted interest rate expectations. Traders are no longer pricing in Federal Reserve cuts this year and are considering that other central banks, such as the ECB, might even hike rates.
On Monday, economic reports showed that growth in the U.S. services sector moderated in March, while the prices paid component for inputs surged at its fastest pace in over 13 years -- a preliminary sign that the prolonged war with Iran is driving up inflationary pressures.
The week's macroeconomic agenda includes U.S. inflation data on Friday, which is expected to quantify the spike in price pressures stemming from rising energy costs. For now, however, market attention remains focused on Trump's deadline and whether a deal can be reached.
"The most likely scenario is that we will not see any conclusion during today's session, and therefore equity markets will lack a clear direction... it should be a session without major variations in stocks, pending an agreement to reopen the Strait of Hormuz. Should this occur, it will likely be announced overnight and would represent a turn for the better," Bankinter analysts noted in a morning briefing.
Key macroeconomic benchmarks for the day include the Eurozone PMI business activity surveys (0800 GMT), the Eurozone Sentix investor confidence index (0830 GMT), and U.S. durable goods orders (1230 GMT).
As of 0702 GMT on Tuesday, Spain's benchmark IBEX 35 was up 48.10 points, or 0.27%, at 17,604.00 points, while the FTSE Eurofirst 300 index of leading European shares advanced 0.15%.
In the banking sector, Santander rose 1.24%, BBVA gained 1.15%, Caixabank advanced 1.54%, Sabadell climbed 0.91%, Bankinter added 0.66%, and Unicaja Banco rose 0.78%.
Among large-cap non-financial stocks, Telefónica gained 0.42%, Inditex edged up 0.04%, Iberdrola shed 0.15%, Cellnex rose 0.59%, and the oil major Repsol ticked up 0.08%.
(Reporting by Tomás Cobos; editing by Benjamín Mejías Valencia)
