European shares muted as oil rally fuels caution; Novartis tumbles

Sept 8 (Reuters) - European shares were little changed on Tuesday as escalating tensions in the Middle East and rising oil prices kept investors cautious, while Novartis suffered its steepest one-day decline on record after reporting a second setback in its drug pipeline. The pan-European STOXX 600 was down 0.05% at 649.6. Switzerland's benchmark index fell 1.6%, weighed down by Novartis, which slid 10.9%. Novartis was the biggest faller on the STOXX 600 after the Swiss drugmaker said its experimental treatment for a muscle-wasting disorder had failed in a late-stage trial. The news came a day after the company disclosed that an experimental cholesterol drug had also failed a closely watched late-stage study. Energy shares gained 0.6% as Brent crude futures hovered around $98 a barrel. Oil prices rose after Yemen's Iran-aligned Houthi forces attacked energy facilities and cities in Saudi Arabia, underscoring the risk that the conflict could spread further across the region and disrupt fuel supplies to global markets. [O/R] Mining stocks also advanced as copper prices climbed. Boliden, Antofagasta and KGHM gained between 4.6% and 6.3%, while the broader European mining index jumped 2%. [MET/L] On the economic front, German exports unexpectedly fell in July, with weaker shipments to European Union countries and China highlighting the fragility of the trade-driven recovery in Europe's largest economy. RISING RATE BETS IN FOCUS Elevated oil prices have revived inflation concerns, contributing to a recent global bond selloff and strengthening expectations that central banks may need to keep monetary policy restrictive for longer. Investors widely expect the European Central Bank to raise interest rates by 25 basis points on Thursday. Although policymakers have signalled limited appetite for further tightening, markets are still pricing in another increase by year-end and one more in 2027. "Any hikes beyond September would move policy from the 'insurance' end of the spectrum into 'restrictive' territory. That shift still lacks sufficient support from the data," ING analysts said in a note. "Markets may also be underestimating concerns about overtightening and the potential spillover into European bond markets." Attention is also turning to U.S. inflation data due later this week. The inflation report follows a stronger-than-expected U.S. jobs reading that reinforced bets on another Federal Reserve rate hike this month. Among other movers, Kion Group rose 6.8% after Citi upgraded the German forklift maker to "buy" from "neutral," citing a potential turning point in the industrial-truck cycle. By Sudeshna Ghoshal and Ragini Mathur