AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Fed’s interest rate decision (94% probability of a cut priced in) and the July Jobs report (4.1%-unch.). Busiest earnings reporting week with mega caps Microsoft, Meta, Apple, and Amazon reporting.
• Europe: BoE interest rate decision (45% chance of a cut priced in). GDP and inflation data for the Eurozone (+0.3% expected), Germany (+0.1%), France, Italy, and Spain. Eurozone inflation is expected to fall to 2.3%. Euro Area's business survey and unemployment rate, as well as Germany's jobless data.
• APAC: In Japan, BoJ interest rate decision (no change expected), and consumer confidence for July, unemployment, retail sales, and industrial production data. China’s July PMI data (expect weak numbers after a poor reaction to the Third Plenum drove the PBoC to deliver emergency rate cuts). In Australia, inflation, trade balance, and retail sales data.
• Global: Any escalation in the conflict between Israel and Hezbollah. Disappointing earnings from any of the four Magnificent Seven reporting this week. Any time Donals Trump walks up to a microphone.

In the past two weeks (during which ROOF Highlights was on leave – totally my bad), investor sentiment has declined in seven out of the ten markets we monitor. It has remained unchanged in two markets and has risen solely in Australia. The increase in Australia can be attributed to its 0.81 correlation with the price of gold, which remains on an uptrend for the year. Developed markets were the most affected by the rising political uncertainty out of the US, which is sure to continue to dominate sentiment for the rest of the year.

It’s official, after Joe Biden dropped out (seriously, you have one off night and everyone treats you like an idiot), the two candidates for the upcoming US Presidential elections in November are current Vice President Kamala Harris (whose popularity ratings makes her most likely to be eaten first in any lifeboat situation), and former President Donald Trump (whose biography reads like a he-man handbook on how to make enemies and influence people). Prepare yourselves for three months of low road 'He-Said, She-Said'.

This election is undoubtedly the most influential factor for global markets post-November 5th. Ironically, the one market on which it is likely to have the least effect afterward is the US market. Investors there have already anticipated the outcome (i.e., the Trump trade is already in motion), The Fed is expected to start cutting interest rates, and the US economy appears resilient to both monetary and geopolitical pressures, necessitating only marginal adjustments to portfolios based on company-specific (earnings) news.

However, what about the rest of the world? The sharp decline in sentiment over the past two weeks for Global Developed Markets investors (from +0.54 to -0.17) indicates that global investors are increasingly apprehensive about a second Trump term. While they could forgive Americans for electing Trump the first time in 2016 - for they knew not what they did - electing him again in 2024, without the pretense of reasonable doubt, would be an entirely different matter.

To be fair, there are numerous other concerns for investors beyond the happenings in Washington, D.C. (a.k.a., "Suck-up Town"). This week, four of the "Magnificent Seven" companies are scheduled to report their earnings. Additionally, the Federal Reserve is meeting to decide whether to proceed with an anticipated interest rate cut, a decision echoed by the Bank of England and the Bank of Japan, both of which are expected to maintain their current rates for now. Meanwhile, China's economic slowdown persists without the anticipated stimulus measures, though emergency rate cuts have been implemented which could take some pressure off markets until the official PMI figures are released. On the geopolitical front, tensions between Israel and Hezbollah are escalating, and peace remains elusive in both Gaza and Ukraine.

What do you get when you combine a critically significant earnings week with an already anticipated interest rate decision with the potential for disappointment, a tense geopolitical situation with no end in sight, and a campaigning Donald Trump whose lack of verbal filtering makes him a favorite of the media? Volatility is likely to remain elevated and keep most investors on the defensive, needing only an excuse to sell rather than a reason to buy.

Note: green background = bullish, red background = bearish



Changes to investor sentiment over the past 180 days for the markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).
• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).
• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.
• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.