ORLANDO, Florida (Reuters) - - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Bonds bounce back

Global trade uncertainty cranked up several notches this week amid a flurry of court rulings around U.S. tariffs and President Donald Trump accusing China of violating a deal with Washington, ensuring world markets ended the month on a cautious footing.

A clutch of economic indicators on Friday that suggested U.S. growth may be slowing more than expected also added to the gloom, making for a turbulent session on Wall Street.

Month-end rebalancing flows were expected to be bullish for bonds, and that's how it appears to have turned out. After four consecutive weeks of declines, Treasuries' prices rebounded this week, particularly at the longer end, thereby bull-flattening the yield curve.

The benchmark 10-year Treasury yield on Friday ended at a three-week closing low around 4.40%, partly capped by figures that showed U.S. PCE inflation last month cooled to 2.1% - to all intents and purposes back at the Fed's target.

It's worth noting, however, that despite the renewed tariff chaos the S&P 500 and Nasdaq this week climbed to within a few percentage points of February's record highs. It won't take that much of a push to test them, although an impetus will be needed.

What might provide that spark? The latest twists and turns on the Trump administration's tariffs, whether that's from the courts or the president's social media posts, appear to be the most likely trigger of major market moves.

The U.S. Senate will start debating Trump's tax-and-spending bill - a "big, beautiful bill" as he has dubbed it - that, in its current form, is set to add nearly $4 trillion to the federal debt over the next decade.

One element of the bill has unnerved investors in the last 24 hours, a tax targeting foreign investors that could potentially weigh on demand for U.S. Treasuries and the dollar. Deutsche Bank's George Saravelos warned that it could "turn the trade war into a capital war."

The U.S. bond market is nervy, despite this week's rebound. The broad thrust from Fed officials' comments this week is policymakers remain in a 'wait and see' mode regarding the economic impact of the tariff uncertainty. Traders don't expect the Fed to cut rates again until September.

Meanwhile, another expected interest rate cut from the European Central Bank on Thursday and May's U.S. employment report on Friday are among the highlights on next week's global calendar.

I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @reutersjamie.bsky.social.

This Week's Key Market Moves

* U.S. Treasuries snap a four-week losing streak, with thelong end outperforming. But May is a bad month for bonds - theICE BofA Treasury index has its biggest fall this year. * Long-dated Japanese bond yields pull back from last week'srecord highs - the 40-year yield tumbles nearly 45 bps, itsbiggest ever weekly fall. * Many key equity indices have their best month sinceNovember 2023, including the MSCI World (up 5.5%) and Nasdaq (up9.5%). * Japan's Nikkei rises more than 5% in May for its bestmonth since February last year. * The MSCI Asia ex-Japan index snaps a six-week winningstreak, closing the week down 0.9%. * Nvidia shares soar 24% in May, their biggest monthly risein a year. May has been a good month for Nvidia shares of late,boosted by Q1 earnings - up 26% last year, and 36% in 2023. * The euro rises 0.4% in May, a negligible move in itselfbut enough to seal a fifth straight monthly gain, its longestmonthly winning streak since 2017. * Bitcoin falls 3% this week, retreating from the recordhigh of $112,000 to clock its first weekly decline in seven.Chart of the Week

I'm feeling generous, so two charts for you this week.

The first is from Simon French at Panmure Liberum. It shows that the gap between the UK 10-year bond yield and the aggregate yield of its G7 peers that exploded around the 'Trussonomics' debacle in late 2022 has not narrowed. More than two and a half years later, it is wider than ever.

Investors are clearly demanding a massive premium for lending to the UK government over other G7 nations, but why? Possible explanations include: UK inflation is seen 'higher for longer', greater risk of fiscal slippage, policy credibility worries.

The second chart might be gaining some attention - and raising hackles - in the White House. It shows the broadest measure of China's yuan exchange rate which, after a lengthy period of stability, has slumped to its weakest level since 2012.

But unlike previous bouts of yuan weakness like the mid-2000s, this is not being driven by FX market intervention from Beijing, says OMFIF's Mark Sobel. In other words, less currency 'manipulation' and more capital outflows due to the huge challenges China's economy is facing.

Either way, it will play into the narrative from Washington that global trade and currency imbalances must be fixed. But trade talks between the U.S. and China appear to have stalled, putting investors back on the defensive.

Here are some of the best things I read this week: 

1. Market Discipline Will Prevail in the U.S. - NourielRoubini 2. Making Sense of the New Global Economy - Dambisa Moyo 3. Failure to communicate is an economic policy risk 4. Today's global imbalances aren't what they used to be -Mark Sobel 5. Lagarde's euro 'battle cry' emphasizes EU cash need:Mike DolanWhat could move markets on Monday?

* Japan, UK, Germany, U.S. manufacturing PMIs (May) * U.S. manufacturing ISM (May) * Several Fed policymakers scheduled to speak at variousevents: Chair Jerome Powell, Governor Christopher Waller, DallasFed President Lorie Logan, and Chicago Fed President AustanGoolsbeeOpinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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(Writing by Jamie McGeever; Editing by Nia Williams)