By Marc Jones
LONDON (Reuters) - Financial markets overcame a jolt from a U.S.-Israeli missile test near Syria on Tuesday, with upbeat data supporting shares and a looming cut in Federal Reserve stimulus pushing the dollar to a fourth day of gains.
European shares edged higher, helped by a second huge mobile telecoms deal in as many days as Microsoft announced a $7.2 billion bid for the phone business of once-dominant Finnish manufacturer Nokia .
The dollar hit its highest in over a month against both the yen and the euro as the prospect of a cut in U.S. monetary stimulus complemented an at least temporary easing in market tensions over the Middle East.
"The Syria situation is clearly a short-term disturbance but we don't expect it to disrupt the U.S. recovery or even the European recovery," said Didier Duret Chief Investment Officer for ABN Amro.
"The volatility we are seeing now is a good period to accumulate (equities) with the medium-term in mind."
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Shares had fallen following reports Russian radar had detected two ballistic 'objects' heading towards the eastern Mediterranean, Europe's FTSEurofirst 300 but confirmation from Israel it was a test firing helped markets recover by midday to stand up 0.2 percent.
Nokia's deal meant technology stocks led the way, while in the bond market the recent sell-off in benchmark German government bonds was extended as their traditional appeal as risk protection continued to wane.
Wall Street had been closed on Monday for the Labor Day holiday and U.S. stock futures pointed to solid gains when trading resumes later, with the S&P 500 seen up 0.9 percent.
With all eyes on what the Federal Reserve does with its $85 billion-a-month stimulus programme this month, ISM manufacturing data due at 1400 GMT will be in focus ahead of jobs data on Friday.
FLIGHT FROM SAFETY
Earlier MSCI's broadest index of Asia-Pacific shares outside Japan had added 0.76 percent, building on Monday's 1.2 percent rise and marking a fourth day of gains.
The Nikkei stock average was the region's standout performer. It surged 3 percent to a three-week high helped by the weaker yen, hopes of continued government stimulus and talk Japan could win the right to host the 2020 Olympic Games.
After Monday's upbeat round of global data, China's non-manufacturing purchasing managers' index (PMI) dropped slightly to 53.9 last month from July's 54.1. But it remained solidly in expansion territory and suggested recent government measures are supporting the economy.
As investors rediscovered an appetite for risk, gold eased about 0.2 percent to $1,391.49 an ounce while the dollar hit a one-month high against a basket of currencies as well as the yen. The greenback bought 99.50 yen, and the dollar index rose as high as 82.379, also underpinned by U.S. monetary policy expectations.
"I expect the dollar to be supported amid expectations that the Federal Reserve will start tapering its quantitative easing," said Kyosuke Suzuki, director of forex at Societe Generale.
Traders expect the Fed to start reducing its stimulus at its policy meeting on September 17-18 unless U.S. payroll numbers due on Friday fall considerably short of forecasts.
While tapering expectations support the dollar, a near-term withdrawal of stimulus would weigh on equities, particularly those in emerging markets that have come under pressure in recent months on expectations of capital outflows.
"It's not a question of whether the U.S. Federal Reserve will cut quantitative easing, it's a matter of how much and the pace of their reduction," said Jackson Wong, Tanrich Securities' vice-president for equity sales.
Australia's dollar bounced more than half a cent as its central bank kept interest rates at a record low 2.5 percent as expected on Tuesday, saying the level was appropriate though it could ease again if needed.
The upbeat global manufacturing data continued to underpin commodities, with copper down only slightly at $7208 a tonne, after the previous session's 2 percent rise.
Brent crude oil prices edged back above $115 a barrel as the firm China data combined with the ongoing geopolitical uncertain while U.S. crude hovered at $107.
(Additional reporting by Lisa Twaronite in Toko and Wayne Cole in Sydney; Editing by Patrick Graham)