Stocks dented by inflation risk from rising oil, dicey geopolitics

LONDON, Sept 7 (Reuters) - Rising oil prices, conflict in the Middle East and political uncertainty in Europe kept investors on edge on Monday, leaving stocks to drift lower ahead of critical U.S. inflation data later this week.

Tehran said it would announce a restricted zone outside ‌the Strait of Hormuz in coming days, after U.S. forces hit three Iranian tankers and Iran's Islamic Revolutionary Guard Corps launched ballistic missiles at ‌two U.S. Navy ships.

As a result, Brent crude futures rose 0.6% to $97 a barrel, the most in seven weeks. The oil price surged almost 8% last week and is now 35% above where ​it was in late February, before the war started.

Prices for diesel, which powers transport, shipping, farming and manufacturing, hit record highs last week and are around 90% higher than they were prior to the war.

With food and fuel prices rising everywhere, central banks are more likely than not to raise interest rates, making this week's reading of U.S. consumer prices a key focus for investors.

The European Central Bank is expected to lift rates to 2.75% on Thursday. Futures imply a 75% chance of another hike to 3.0% by December.

Likewise, ‌markets are pricing in a 75% chance the Bank ⁠of Japan will raise rates a quarter point at its meeting on September 18, with a 60% probability of another move by December.

"Central bank patience through the energy shock has been supportive of asset prices and the credit cycle," said Bruce Kasman, global head ⁠of economics at JPMorgan. "However, central banks are now on the move."

For the Federal Reserve, last week's payrolls report, which blew past expectations with a rise of 162,000 in August, has left markets pricing a 58% chance of a hike when it meets on September 16, and 70% for a move in October.

With an ECB hike all but in the bag, ​the ​euro traded a touch stronger on the day around $1.1625. It has drifted lower since hitting three-month highs ​in August and, with political friction mounting on multiple fronts, ‌may struggle to get much upward momentum, analysts said.

In Germany, the Alternative for Germany (AfD) surged into first place in state elections in Saxony-Anhalt on Sunday, putting a far-right party within reach of power at state level for the first time since World War Two. While short of a majority and a long way from gaining national power, the AfD has said one of its policies would be to ditch the euro.

"This development is dangerous for the longer-term stability of the single currency," XTB research director Kathleen Brooks said.