Market caution builds as risk appetite ebbs ahead of key central bank decisions

Markets wrapped up May on a cautious note, with risk appetite faltering as volatility returned to equities and a heavy macro calendar looms.
By Kyle Rodda and Daniela Hathorn

The final days of the month were marked by renewed trade tensions, policy backpedals from the Trump administration, and a lingering sense of asymmetry between hope and risk in global asset prices.

As we enter a pivotal week for central banks and macro data, here’s what’s shaping market sentiment.

Equities stumble as "TACO" trade returns

Equity markets ended May on shaky footing after a choppy final week of trading. The S&P 500 pulled back from its highs, while European indices like the DAX and STOXX 600 showed signs of fatigue, with rounding tops forming on technical charts. The sharp price action on Thursday and Friday reflected a market reacting less to fundamentals and more to headline risk—especially around tariffs and trade.

(Source: Trading View)
(Past performance is not a reliable indicator of future result)

At the centre of market attention is what some have dubbed the “TACO” trade—a recurring pattern where President Trump talks tough on tariffs but ultimately backs down when financial markets react negatively. Traders appear to be betting on this behaviour, treating it as a backstop for equities. But this introduces asymmetric risk: optimism is priced in, but downside scenarios remain underappreciated.

Fixed income markets have also played a key role in containing the administration’s policy ambitions. Bond vigilantes pushed US 30-year yields near 5% last week, reflecting concern over fiscal profligacy and the absence of any credible plan to reduce debt.

ECB set to cut rates again amid tariff drag

This week’s highlight is the European Central Bank meeting on Thursday, where markets expect a 25-basis-point rate cut—already 95–97% priced in. May’s CPI print on Tuesday will serve as a prelude, with expectations for inflation to fall to the ECB’s 2% target, down from 2.2%.

Lagarde’s ECB has been at the forefront of easing, having already delivered 175bps of cuts over the past year. But internal divisions are emerging. Some members of the Governing Council are urging caution, arguing the bank should pause and assess the cumulative impact of prior cuts—especially given rising tariff threats from the US and an already weak growth outlook.

Markets will scrutinise Lagarde’s communication. If she signals continued easing, European equities may find fresh momentum. However, if the message skews toward patience or a possible pause in July, stocks could falter and the euro may see some upside. With the ECB further ahead in the cycle than the Fed or BoE, any shift in tone could have outsized impact on sentiment.

US jobs data: A key test for dollar and policy expectations

Attention also turns to the US labour market, with nonfarm payrolls due Friday. Consensus forecasts suggest job gains around 125,000, with unemployment ticking up slightly to 4.2%. PMI data is also expected to show a modest improvement, supporting the narrative of US economic resilience despite lingering tariffs and fiscal uncertainty.

The dollar, which has been trending lower since mid-April, may find support if the data beats expectations. However, the technical setup for the dollar remains fragile, with rallies continuing to fade. A failure to hold above key levels would reinforce bearish sentiment and increase the likelihood of a retest of recent lows.

Oil trapped in range as supply pressures build

Oil prices saw a bounce early this week, with WTI rising nearly 3%, but remain range-bound between $55 and $65. OPEC+ confirmed another production increase—411,000 barrels per day for July—adding to growing concerns about oversupply.

Key producers like Saudi Arabia and Russia appear to be prioritising market share over price stability, potentially responding to US pressure for cheaper energy and trying to offset weaker revenues with higher volumes. The supply push comes as demand indicators remain sluggish, especially with growth momentum in China and Europe under strain.

While a technical breakout above $64 could trigger upside, the broader picture still suggests downside risks dominate—especially if demand continues to underwhelm and geopolitical risks abate.

(Source: Trading View)
(Past performance is not a reliable indicator of future result)

Gold: Long-term bullish, but short-term catalyst lacking

Gold continues to hover around $3,350, unable to break decisively above $3,400 or below $3,000. Risk-on sentiment, especially as doubts around US tariffs ebb, has weighed on short-term demand. Yet, structural supports—central bank buying, weaker dollar outlook, and real rate compression—remain intact.

As Daniela noted, investors appear to be waiting for a new short-term catalyst. Renewed US-China trade tensions or a weaker-than-expected jobs report could revive gold’s momentum. But in the absence of a clear risk-off trigger, gold may continue to consolidate.

(Source: Trading View)
(Past performance is not a reliable indicator of future result)

The week ahead: Divergence, data, and a dovish drift?

Markets face a critical inflection point. Central bank divergence is in focus, with the ECB leading on cuts, the Fed still cautious, and the BoE and RBA in various stages of hesitation. Trade policy remains the wild card, with fragile sentiment prone to whipsawing on headlines.

With equities stretched, bonds twitchy, and currencies indecisive, investors will be watching for signals that either confirm the soft landing narrative—or challenge it. As ever, hope is not a strategy, and this week’s data and decisions will test just how much of it is already priced in.

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