ORLANDO, Florida, May 23 (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 the

S&P 500 shedding 2.6% for its worst week since the end of March.

* Apple shares' fall on Friday extends their weekly decline

to

7.5%. They've fallen eight straight days, their worst run since

January 2022.

* European stocks rise for a sixth straight week,

but only

just. Germany's DAX hits a record high above 24000 points and is

up 30% from its April 7 low.

* The dollar index falls nearly 2%, its first weekly loss in

five.

* Japan's 30-year bond yield spikes 10 bps in the week to a

record

high just shy of 3.20%. U.S. and UK equivalents also hit

historic 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

does

that mean in practice? - Brookings

2. Fed framework review should tackle communication

issues

- OMFIF

3. Tariffs as Cost-Push Shocks: Implications for

Optimal

Monetary Policy - NBER

4. Demand versus Supply: Which Is More Important for

Inflation? - San Francisco Fed

5. Farewell, America - Carl Bildt

What 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 speaks

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.

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(Writing by Jamie McGeever; Editing by Nia Williams)