ORLANDO, Florida (Reuters) - - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

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Cautious optimism around a possible de-escalation in the week-long war between Israel and Iran helped foster a relatively positive tone across world markets on Friday, lifting most stock markets and sealing oil's biggest decline in over a month.

You'll note a high degree of equivocation there. President Donald Trump taking up to two weeks to decide on America's involvement offers no immediate clarity, even if he is open to direct talks, and negotiations between Iran's foreign minister and his European counterparts in Geneva are at the early stage.

However, Wall Street didn't feel much of the earlier optimism on Friday.

Tehran insists it will not talk directly to Washington about a new nuclear deal until Israel ceases its attacks. The bombing and retaliatory strikes continue.

It's a fluid and fragile situation, but compared to a week ago when the conflict started, it's perhaps less bleak, which explains why many markets have regained their footing. It's worth remembering that Wall Street and world stocks earlier this week were a whisker away from their record highs.

Developments in the war and on the diplomatic field over the weekend will go a long way to setting the tone for markets on Monday. And investors will continue to digest what was, in many ways, a pretty monumental week for central banks.

To recap, the Federal Reserve took a hawkish turn in its projected interest rate path even though Chair Jerome Powell signaled policymakers are flying blind, while the Bank of Japan took a dovish turn in its balance sheet reduction plans.

The Swiss National Bank cut rates to zero and admitted, albeit reluctantly, that rates could go negative, Norway's central bank delivered a surprise rate cut, and Brazil's central bank defied expectations by raising rates to the highest since 2006 and signaling it could tighten policy further.

A raft of Fed officials are on the stump next week, and investors will be looking through the blizzard of headlines to see how the consensus stacks up against the new, less dovish 'dot plots'. Top of the bill will be Powell's semi-annual testimony to Congress on Tuesday and Wednesday.

Fed Governor Christopher Waller told CNBC on Friday that a rate cut should be on the table next month because inflation is tame and unlikely to be boosted on a lasting basis by import tariffs.

But Richmond Fed President Thomas Barkin told Reuters in an interview there's no rush to cut rates because tariffs could indeed fuel inflation. What's more, the economy and labor market are holding up well right now.

It's gone pretty quiet on the trade front, an indication that the Trump administration is finding it harder than it imagined to secure the dozens of trade deals it promised - Trump himself has said that China and Japan are "tough" in their negotiations.

China is not blinking, and why should it? As CIBC economists point out, China holds all the cards when it comes to global rare earths and pharmaceuticals supply, the U.S. is a much smaller market for its exports than it used to be, and Beijing has a wider array of retaliatory tools at its disposal than it did in 2018.

Last but not least, "the tolerance to pain in autocratic China is notably higher than in the (still) democratic US," they note.

The next few weeks will be pivotal for markets as investors eye the half-year point, the July 9 expiry of Trump's pause on 'reciprocal' tariffs, and Trump's two-week window to decide on the level of U.S. involvement in the Iran-Israel war.

This Week's Key Market Moves

* European stocks underperform. The pan-euro zone STOXX 50slides nearly 2%, Britain's FTSE 100 loses nearly 1%, for theirworst weeks in two months. * The Japanese yen slides more than 1% against the dollarafter the BOJ's dovish tilt on its balance sheet reduction andgovernment's plan to cut super-long bond sales. That's the yen'sworst week of the year. * The Norwegian crown falls 2.5% vs the dollar, one of itsbiggest weekly declines in the last few years, after NorgesBank's surprise rate cut reverses oil-related gains. The crownhit a two and a half year high last week. * A rollercoaster week for oil, with Brent crude trading ina $10 range of around $70-$80/bbl. Friday's slide cuts theweekly gain to 3.5%, but Brent is still up 20% this month, whichwould be its biggest monthly gain since November 2020. * Platinum rises 3%, not a huge move but intra-week ithits its highest level since September 2014 at $1,348/oz on hugeChinese demand. It's up 20% this month, putting June on trackfor the third-best month on record.Chart of the Week

Two charts again, and they are related.

The first is from Goldman Sachs and shows wage pressures in the developed G10 countries noticeably cooling (admittedly from elevated levels). This helps explain the second, from economist Phil Suttle, which shows developed and emerging market interest rate paths are diverging sharply - interest rates are coming down in DM, not so in EM.

How long will that divergence last?

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

1. The economic consequences of the second Trumpadministration: A preliminary assessment 2. Should We Have Faith in Markets? 3. The Sources of Global Economic Uncertainty 4. Disentangling trade policy uncertainty and equity marketperformance 5. Trump's economic 'golden age' meets Fed's brass tacksWhat could move markets on Monday?

* Israel-Iran conflict * Singapore inflation (May) * June flash PMIs from Australia, Japan, India, euro zone,UK, and U.S. * Chicago Fed President Austan Goolsbee speaksOpinions 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)