Cautious optimism around a possible de-escalation in the week-long war between Israel and Iran helped foster a relatively positive tone across world markets on Friday, lifting most stock markets and sealing oil's biggest decline in over a month.
You'll note a high degree of equivocation there. President Donald Trump taking up to two weeks to decide on America's involvement offers no immediate clarity, even if he is open to direct talks, and negotiations between Iran's foreign minister and his European counterparts in Geneva are at the early stage.
However, Wall Street didn't feel much of the earlier optimism on Friday.
Tehran insists it will not talk directly to Washington about over a new nuclear deal until Israel ceases its attacks. The bombing and retaliatory strikes continue.
It's a fluid and fragile situation, but compared to a week ago when the conflict started, it's perhaps less bleak, which explains why many markets have regained their footing. It's worth remembering that Wall Street and world stocks earlier this week were a whisker away from their record highs.
Developments in the war and on the diplomatic field over the weekend will go a long way to setting the tone for markets on Monday. And investors will continue to digest what was, in many ways, a pretty monumental week for central banks.
To recap, the Federal Reserve took a hawkish turn in its projected interest rate path even though Chair Jerome Powell signaled policymakers are flying blind, while the Bank of Japan took a dovish turn in its balance sheet reduction plans.
The Swiss National Bank cut rates to zero and admitted, albeit reluctantly, that rates could go negative, Norway's central bank delivered a surprise rate cut, and Brazil's central bank defied expectations by raising rates to the highest since 2006 and signaling it could tighten policy further.
A raft of Fed officials are on the stump next week, and investors will be looking through the blizzard of headlines to see how the consensus stacks up against the new, less dovish 'dot plots'. Top of the bill will be Powell's semi-annual testimony to Congress on Tuesday and Wednesday.
Fed Governor Christopher Waller told CNBC on Friday that a rate cut should be on the table next month because inflation is tame and unlikely to be boosted on a lasting basis by import tariffs.
But Richmond Fed President Thomas Barkin told Reuters in an interview there's no rush to cut rates because tariffs could indeed fuel inflation. What's more, the economy and labor market are holding up well right now.
It's gone pretty quiet on the trade front, an indication that the Trump administration is finding it harder than it imagined to secure the dozens of trade deals it promised - Trump himself has said that China and Japan are "tough" in their negotiations.
China is not blinking, and why should it? As CIBC economists point out, China holds all the cards when it comes to global rare earths and pharmaceuticals supply, the US is a much smaller market for its exports than it used to be, and Beijing has a wider array of retaliatory tools at its disposal than it did in 2018.
Last but not least, "the tolerance to pain in autocratic China is notably higher than in the (still) democratic US," they note.
The next few weeks will be pivotal for markets as investors eye the half-year point, the July 9 expiry of Trump's pause on 'reciprocal' tariffs, and Trump's two-week window to decide on the level of U.S. involvement in the Iran-Israel war.
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