ORLANDO, Florida, June 11 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

I'm excited to announce that I'm now part of Reuters Open

Interest (ROI), an essential new source for data-driven, expert

commentary on market and economic trends. You can find ROI on

the Reuters website, and you can follow us on LinkedIn and X.

The US and China have reached a trade deal, or at least

agreed on the framework of a deal, which together with

surprisingly soft U.S. inflation data, gave markets a lift on

Wednesday. But Wall Street's gains were mild, and they were

later wiped out by rising tensions in the Middle East.

In my column today I look at the 'equity risk premium' and

other metrics that suggest relative U.S. equity and bond

valuations are getting very stretched. More on that below, but

first, a roundup of the main market moves.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. China's latest trade truce with US leaves

investors none

the wiser

2. Dollar keeps losing market share but euro slow to

benefit: ECB study

3. US importers turn to brokers to navigate

Trump-era

tariffs, at a cost

4. When it comes to a US debt default, never say

never

5. No longer the big outlier, Italy sees bond

renaissance:

Mike Dolan

Today's Key Market Moves

* Wall Street ends in the red, having earlier hit

highs

last seen in February-March. The S&P 500 falls 0.3%, the Nasdaq

loses 0.5%. Consumer cyclicals sector falls 1%, and energy is

the best-performing sector up 1.5%.

* U.S. stock market volatility, as measured by the VIX

index,

falls to its lowest in almost four months earlier in the day.

* Treasuries rally, also boosted by soft inflation and a

strong

10-year auction. Yields end down as much as 7 bps, curve bull

steepens slightly.

* Oil hits a two-month high, rising more than 4%

after

sources say the US is preparing to evacuate its Iraqi embassy

due to heightened security concerns in the region. Brent crude

reaches $69.77/bbl, WTI rises above $68/bbl.

* Precious metals rise, led by a surge in platinum to a

4-year

high above $1,280/oz. Platinum rose as much as 5% and is up over

20% in June, which would be its best month since 2008.

Good vibrations turn sour

It's a "done" deal, according to U.S. President Donald

Trump, although the he and Chinese leader Xi Jinping still have

to finalize the wording of the trade agreement between the two

superpowers and sign off on it.

The main points of the deal appear to be: China will remove

export restrictions on rare earth minerals and other key

industrial components; U.S. tariffs on Chinese goods will total

55%; Chinese tariffs on U.S. goods will total 10%.

Trump could not have been more enthusiastic in his praise

for the agreement on Wednesday, and Commerce Secretary Howard

Lutnick said 'deal after deal' with other countries will follow

in the weeks ahead.

Yet, judging by the relatively muted market reaction,

investors are less enthused. And given the chaotic and

unpredictable nature of the Trump administration's tariff

announcements thus far, the irony of Treasury Secretary Scott

Bessent calling on China to be a "reliable partner" in trade

negotiations will not be lost on some observers. Especially, one

suspects, in Beijing.

Based on these proposed China levies, and with the US

expected to conclude more trade deals in the coming weeks, the

overall U.S. effective tariff rate will be lower than feared a

couple of months ago. That's a relief.

But the effective tariff rate of around 15% that many

economists expect will still be significantly higher than the

2.5% rate at the end of last year, and would be the highest

since the 1930s. Also, as the May inflation figures showed,

tariffs have yet to be felt on prices.

Investors - and Fed policymakers, who meet next week - are

in a state of limbo. How will corporate profits and consumer

spending be affected? What proportion of the tariffs will

companies "swallow", and how much will they pass on to their

customers?

Zooming out, inflation appears to be cooling around the

world, although this trend is expected to reverse once tariffs

start to fuel higher goods price inflation.

Figures on Wednesday showed that U.S. consumer inflation and

Japanese wholesale inflation were lower than expected in May.

These reports follow similar numbers from Europe recently, and

China remains stuck in its battle against deflation.

Next up is India, which releases consumer inflation figures

on Thursday, which are expected to show annual inflation slowed

to 3.0% in May, the lowest in more than six years. Another focus

for investors on Thursday will be the auction of 30-year U.S.

Treasury bonds.

US stocks-bonds warnings flash amber again

Calm has descended on U.S. markets following the 'Liberation

Day' tariff turmoil of early April. But Wall Street's rally has

revived questions about U.S. equity valuations, as stocks once

again look super pricey compared to bonds.

Since the chaotic days of early April, U.S. equities have

rebounded fiercely, with the S&P 500 up 25%, putting the Shiller

cyclically adjusted price-earnings (CAPE) ratio for the index in

the 94th percentile going back to the 1950s, according to bond

giant PIMCO.

Stocks are looking expensive in absolute terms, and in

relation to bonds. The equity risk premium (ERP), the difference

between equity yields and bond yields, is near historically low

levels.

According to analysts at PIMCO, the ERP is now zero. The

previous two times it fell to zero or below were in 1987 and

1996-2001. In both instances, the ultra-low ERP precipitated a

steep equity drawdown and sharp fall in long-dated bond yields.

"The U.S. equity risk premium ... is exceptionally low by

historical standards," they wrote in their five-year outlook on

Tuesday. "A mean reversion to a higher equity risk premium

typically involves a bond rally, an equity sell-off, or both."

But reversion to the mean doesn't just happen by magic. A

catalyst is needed. Equities have recovered largely because they

were oversold in April, trade tensions have been dialed down,

and investors remain confident that Big Tech will drive solid

AI-led earnings growth.

So even though huge economic, trade, and policy risks

continue to hang over markets, there is no sign of an imminent

catalyst that would cause an equity market selloff.

CHEAP FOR A REASON

The flip side of equities looking expensive is that bonds

look like a bargain.

Indeed, the relative divergence between stocks and bonds is

such that, by one measure, U.S. fixed income assets are the

cheapest relative to equities in over half a century.

Using national flow of funds data from the Federal Reserve,

retired strategist Jim Paulsen calculates that the total market

value of U.S. bonds as a percentage share of the total market

value of U.S. equities is the lowest since the early 1970s.

"Since the aggregate U.S. portfolio is currently

aggressively positioned, investors may have far more capacity

and desire to boost bond holdings in the coming years than most

appreciate," Paulsen wrote last week.

But bonds are 'cheap' for a reason. Washington's profligacy

- the reason ratings agency Moody's recently stripped the U.S.

of its triple-A credit rating - and inflation worries have kept

yields stubbornly high. The term premium - the risk premium

investors demand for holding long-term debt rather than rolling

over short-dated loans - is the highest in over a decade,

reflecting concerns about Uncle Sam's long-term fiscal health.

And the diagnosis here shows no signs of improving. Trump's

'Big Beautiful Bill' is expected to add $2.4 trillion to the

U.S. debt over the next decade, according to the nonpartisan

Congressional Budget Office, likely putting more upward pressure

on yields.

Of course, equity investors do seem to be pricing in a very

rosy scenario, and the past few months have shown how quickly

the market landscape can change. The U.S. economy could weaken

more than expected, the trade war could escalate, or there could

be a geopolitical surprise that causes bond yields and equity

prices to fall.

Investors should therefore be mindful of the warnings being

sent by ERPs and other absolute and relative valuation metrics.

However, they should also remember that stretched valuations can

get even more stretched. As the famous saying goes, markets can

stay irrational longer than investors can remain solvent.

What could move markets tomorrow?

* India CPI inflation (May)

* UK trade (April)

* UK industrial production (April)

* ECB's Jose Luis Escriva and Frank Elderson speak at

separate

events

* Brazil retail sales (May)

* $22 billion U.S. 30-year Treasury note auction

* U.S. weekly jobless claims

* U.S. PPI inflation (May)

Opinions 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.