ORLANDO, Florida (Reuters) - - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Just when a degree of calm appeared to have settled over world markets, despite a worrying spike in many countries' long-term bond yields, U.S. President Donald Trump gave the world a stark reminder on Friday that his trade war is far from over.

In threatening 50% tariffs on European goods effective June 1 and floating a 25% charge on Apple iPhones sold in the U.S., Trump shook investors from any complacency the recent de-escalation may have cultivated.

European and U.S. stocks slumped - the S&P 500 sealed its steepest weekly fall since March - ensuring it will be a nervy and anxious long weekend for investors. U.S. and UK markets are closed on Monday for holidays.

The optimistic view is this is a familiar negotiation tactic - come out all guns blazing, create chaos, secure concessions, retreat, then claim victory since whatever deal is struck is nowhere near as bad as the original worst-case scenario.

Analysts at Citi are confident tariff fears are contained, and that a 50% levy on Europe won't last long even if it is implemented. The downside for risky assets is "manageable".

This may be the path U.S.-Europe talks follow, as appears to be the case with the U.S.-China negotiations. But large doses of uncertainty and risk have been injected back into markets, and investors must price assets accordingly.

Barclays economists estimate that if 50% tariffs on EU goods are realized, the overall trade-weighted tariff rate on all U.S. imports would rise to 21% from 14%, and an extra 0.5 percentage point hit to GDP growth would put the U.S. economy on the brink of recession.

The other main focus for investors this week was sovereign bonds, specifically longer maturities, in many G7 countries including the U.S., Japan and Britain.

Weak auctions, debt and deficit worries, and policy paralysis fears pushed long-dated yields to multi-year or record highs. Moody's stripping the U.S. of its triple-A credit rating a week ago also weighed on the price of Treasuries.

Worryingly, rising U.S. Treasury yields offered no support to the dollar and finally started to weigh on Wall Street. Indeed, the slump in U.S. stocks immediately after Wednesday's 20-year note auction was the third-worst market reaction to a bond auction ever, according to Kevin Gordon at Charles Schwab.

The U.S. and UK holiday on Monday and month-end flows were always likely to distort markets next week. A re-escalation of global trade tensions and historically high bond yields are now in the mix too.

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

* Wall Street's main indexes end the week lower, with theS&P 500 shedding 2.6% for its worst week since the end of March. * Apple shares' fall on Friday extends their weekly declineto 7.5%. They've fallen eight straight days, their worst runsince January 2022. * European stocks rise for a sixth straight week, but onlyjust. Germany's DAX hits a record high above 24000 points and isup 30% from its April 7 low. * The dollar index falls nearly 2%, its first weekly loss infive. * Japan's 30-year bond yield spikes 10 bps in the week to arecord high just shy of 3.20%. U.S. and UK equivalents also hithistoric highs of 5.16% and 5.60%, respectively.Chart of the Week

The dollar's slide is remarkable. I wrote this week that while there are many valid long-term reasons to be bearish on the dollar - fiscal woes, policy credibility, end of 'U.S. exceptionalism', de-dollarization, to name a few - the pace of selling was unsustainable and a short-term reversal appeared likely.

The dollar's lurch lower on Friday following Trump's latest tariff salvos puts any correction on ice. But it's still on the cards, if the breakdown in the dollar's correlation with yield spreads is any guide.

The dollar's link to U.S.-euro zone yield spreads is usually very tight - when the dollar's yield advantage widens, the currency rises; when it shrinks, the dollar weakens. But that correlation collapsed completely round about ... Liberation Day. The link is broken, but history suggests it won't be for long.

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

1. Why is the Federal Reserve independent, and what doesthat mean in practice? - Brookings 2. Fed framework review should tackle communication issues- OMFIF 3. Tariffs as Cost-Push Shocks: Implications for OptimalMonetary Policy - NBER 4. Demand versus Supply: Which Is More Important forInflation? - San Francisco Fed 5. Farewell, America - Carl BildtWhat could move markets on Tuesday? (U.S. and UK markets are closed on Monday)

* South Korea consumer sentiment * Hong Kong trade (April) * Bank of Japan Governor Kazuo Ueda speaks * Germany GfK consumer sentiment (June) * U.S. 2-year Treasury note auction * U.S. durable goods (April) * U.S. consumer confidence (May) * Minneapolis Fed President Neel Kashkari 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)