ORLANDO, Florida, June 5 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

There was plenty of meaty news for investors to get their

teeth into on Thursday - U.S. President Donald Trump and Chinese

Premier Xi Jinping's long-awaited phone call, a rate cut and

guidance from the European Central Bank, and more soft U.S.

labor market data. But the biggest market-mover of all? The

public 'bromance' break up between Trump and Tesla CEO Elon

Musk.

In my column today I look at Wall Street's remarkable

recovery from the post-'Liberation Day' depths of despair. The

headwinds haven't gone away, but the 'hopium' rally could still

have room to run. 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. Trump threatens Musk's government deals as feud

explodes

over tax-cut bill

2. U.S. stocks heal from tariff pain but trade news

to keep

markets edgy

3. Franc leading Swiss back to deflation vortex,

asset

stockpiling: Mike Dolan

4. Big central banks' forecasting lens gets fogged

by U.S.

tariffs

5. The world's auto supply chain is in the hands of

a few

Chinese bureaucrats

Today's Key Market Moves

* Tesla shares sink 14% after Trump lashes out at

Musk,

escalating a public spat between the two. Tesla shares are now

down 33% this year.

* The Nasdaq slides 0.8% and the S&P 500 falls 0.5%.

* The dollar hits a 7-week low on an index basis.

It's now

a whisker from taking out April's low and plumbing depths not

seen in three years.

* Sterling rises above $1.36 for the first time

since

February 2022.

* Silver hits a 13-year high of $36/oz, and platinum jumps

around

5% to a 3-year high of $1,145/oz.

Trump-Musk feud sinks stocks

So, the Trump-Xi call to defuse trade tensions finally took

place. The cynical view would be that it yielded nothing

concrete other than an agreement to keep talking, suggesting

China is standing firm and Trump may be forced into another

major climbdown.

The more optimistic take, which investors initially adopted,

is that the talks were constructive and cordial, evidenced by

the tone of Trump's social media post and the fact that the two

invited each other to visit.

But that's pretty thin gruel, and it wasn't enough to

support Wall Street's initial gains. After hitting a record high

for a second day, the MSCI All Country index ended the session

flat.

Investor sentiment was soured by the latest weekly jobless

claims figures, the second warning from the labor market in 24

hours after Wednesday's ADP private sector employment report. If

these trends are reflected in May's nonfarm payrolls on Friday,

markets could be in for a rocky ride.

Some of the U.S. economic gloom was offset by the U.S. trade

deficit narrowing in April at the fastest pace ever, thanks to a

collapse in imports as the front-running of purchasing goods

from overseas ahead of tariffs ebbed. This bodes well for second

quarter GDP growth, and the Atlanta Fed's GDPNow model estimate

for second quarter growth was revised up a touch to an

annualized 3.8%.

Like the first quarter GDP contraction, however, the

expected rebound in Q2 is completely driven by pre-tariff

distortions in the trade data.

Meanwhile, the European Central Bank cut interest rates for

the eighth time since last June, by a quarter point to 2.00%.

President Christine Lagarde signaled a pause in the easing

cycle, telling reporters the bank is in a "good position" on

monetary policy right now.

But more cuts are likely to come, just a bit later this year

than many economists had expected. Rates traders still see 50

bps of easing this year, with 25 bps cuts in September and

December.

Lastly, but by no means least, the 'bromance' between the

world's most powerful man and its richest erupted into a

rancorous public fight, as Trump threatened to cut off

government contracts with companies owned by Musk.

The 14% slump in Tesla shares dragged Wall Street into the

red, casting a shadow over world markets going into the final

trading day of the week.

Wall Street's 'hopium' high not exhausted yet

By any measure, the recent resilience of U.S. stocks is

remarkable, with Wall Street powering through numerous headwinds

to erase all its tariff-fueled losses and move into positive

territory for the year. And although these headwinds haven't

gone away, the rally may still have some juice left in it.

Since the April 7 lows plumbed after U.S. President Donald

Trump's 'Liberation Day' tariff debacle, the S&P 500 and Nasdaq

are up 23% and 32%, respectively. 'Big Tech' has led the way,

with the Roundhill 'Magnificent Seven' ETF gaining more than

35%.

On the face of it, this is remarkable given that many of the

concerns that sparked the crash - elevated U.S. import tariffs,

tensions between the world's two largest economies, and chaotic

and unorthodox policy out of Washington - remain in place today.

Equity bulls are essentially betting that many things will

go right in the coming months: the Federal Reserve will cut

rates; no economic downturn; inflation won't spike despite the

tariffs; U.S. tech companies will continue generating strong

results; fiscal concerns in Washington will moderate; and

perhaps most importantly, Trump will continue to back down on

his most aggressive tariff threats - or to use the acronym de

jour, investors are assuming the 'TACO' (Trump Always Chickens

Out) trade will hold.

That's a lot of stars aligning.

Some of the biggest names in finance are skeptical,

particularly regarding the U.S. fiscal outlook. Bridgewater

founder Ray Dalio and JPMorgan CEO Jamie Dimon, both long-time

deficit hawks, this week repeated their warnings that the U.S.

debt is unsustainable. But these calls have fallen on deaf ears,

or equity investors simply think any fiscal fallout will take

years to materialize.

SHORT-LIVED DIPS

On the one hand, investors - especially the retail crowd

believed to be driving this rally - appear to be overly

optimistic. But looked at another way, U.S. equity investors may

not be ignoring today's underlying risks, but simply viewing

them less apocalyptically than they did a few months ago.

Indeed, the overwhelmingly negative sentiment from earlier this

year paved the way for the recent rebound.

Sentiment among institutional investors reached extreme

levels of bearishness in the wake of 'Liberation Day', and

recession fears ballooned to historically high levels as well,

Bank of America's April fund manager survey showed.

Meanwhile, May's survey showed fund managers holding the

biggest underweight position in U.S. equities in two years. When

sentiment and positioning are that stretched, it doesn't take

much for prices to snap back in the opposite direction.

If the latest American Association of Individual Investors

(AAII) Sentiment Survey is any guide, the snap back in equities

still has room to run. Pessimism over the short-term outlook for

U.S. stocks increased to an "unusually high" 41.9% last week,

above its historical average of 31.0% for the 26th time in 28

weeks.

As HSBC's multi-asset strategy team noted this week, it is

precisely because these sentiment and positioning indicators are

being kept "thoroughly in check" that market dips now are

short-lived.

It's also good to remember that even though Wall Street has

erased its early losses and valuations are rising back towards

their recent highs, U.S. stocks are still laggards this year.

The S&P 500 is up only 1.5% in 2025 thus far, while the MSCI

All Country World Index has jumped around 6%, hitting an

all-time high on Wednesday. This suggests there may be room for

U.S. outperformance on a relative basis in the coming weeks and

months, though, of course, relative value metrics might still

favor non-U.S. markets.

This doesn't mean we should expect capital to start flooding

back into the U.S. again. International institutional investors

may continue to rethink their allocation to U.S. assets,

creating a long-term risk to U.S. stocks. But for now, domestic

U.S. investors are picking up the slack.

What could move markets tomorrow?

* India interest rate decision

* Germany trade (April)

* Germany industrial production (April)

* Euro zone retail sales (April)

* Euro zone GDP (Q1, revised)

* U.S. non-farm payrolls, unemployment rate (May)

* Canada employment (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.