ORLANDO, Florida, – 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

* 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’ 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.

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 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 industrial production

* U.S. non-farm payrolls, unemployment rate

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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