Markets settled into a more measured tone on Gulf developments as the initial excitement over the preliminary agreement between Washington and Tehran began to fade.

Oil prices, which settled at a three-month low overnight, reflected the cautious stance, with Brent crude futures up 0.1 percent at US$83.25 a barrel. Shippers in Asia and Europe said rebuilding confidence in resuming transit through the Strait of Hormuz could take weeks.

MSCI's broadest index of Asia-Pacific shares outside Japan erased gains to trade flat after an initial rally, with stocks in Hong Kong .HSI weighing on the benchmark after weaker-than-expected retail sales and fixed-asset investment data from China. Japan's Nikkei 225 was down 0.3 percent, retreating from a record high as S&P 500 e-mini futures slipped 0.1 percent.

While US President Donald Trump's announcement of a deal with Iran drew initial investor relief on Monday, it also puts Washington on a collision course with Israel.

"While it is an important diplomatic breakthrough that should remove a key source of market volatility, the durability of the deal is likely to be tested in the future," Westpac analysts wrote in a research note. "Many sticking points, including the fate of Iran’s nuclear program, were left to be resolved in subsequent negotiations."

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Wall Street rally

Overnight on Wall Street, stocks and bonds rallied on optimism over the deal. The S&P 500 jumped 1.7 percent and the Nasdaq Composite surged 3.1 percent, while the Dow Jones Industrial Average and the STOXX 600 both closed at record highs.

Beyond geopolitics, traders are awaiting several major central bank decisions, including the Bank of Japan, which is expected to raise interest rates to a 31-year high on Tuesday.

Deputy Governor Shinichi Uchida will hold a press briefing after the meeting, which Governor Kazuo Ueda will miss because he is undergoing medical treatment.

"We do not anticipate any major changes to the Bank’s assessment of current conditions," analysts from Mitsubishi UFJ wrote in a research note.

"We expect Deputy Governor Uchida’s press conference, including the rationale he presents for the rate-hike decision, will be based largely on Governor Ueda’s June 3 speech," the note added. "Mr. Uchida is also likely to follow the governor’s remarks when discussing future policy decisions."

The Reserve Bank of Australia will pause its tightening cycle when it meets later, according to a Reuters poll of economists.

The US dollar index, which measures the greenback's strength against a basket of six currencies, held steady at 99.69, firmly within the tight trading channel in which it has sat for the past three sessions.

The yield on the US 10-year Treasury bond was up 0.2 basis point at 4.469 percent. Gold inched 0.1 percent higher to $4,311.12 an ounce.

In cryptocurrency markets, bitcoin was down 0.3 percent at $66,281.99, while ether slumped 1.3 percent to $1,791.39.

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