AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Services PMI and trade balance data. Earnings reports from Caterpillar, Uber, Airbnb, Walt Disney, and SoftBank.
• Europe: Eurozone retail sales and PPI data. German industrial production and inflation figures. France unemployment data, and Services PMI data for the UK.
• APAC: China trade balance and inflation data. Minutes from last week’s BoJ meeting. RBA interest rate decision in Australia.
• Global: A (not ‘if’ but ‘when’) retaliation by Iran leading to a widening Middle East conflict. Further souring on the AI business model leading to an eventual bursting of the AI bubble?

Investor sentiment experienced a significant decline last week, primarily due to concerns over an widening conflict in the Middle East and increasing skepticism regarding the AI business model. In the preceding week, three out of ten markets exhibited bullish sentiment, with no markets displaying bearish sentiment. However, by the end of last week, four markets had shifted to a bearish outlook, while another three turned negative. Australian investors were the only ones to maintain a bullish stance, though sentiment there also trended downward by the week's end. In China, investor sentiment dropped from bullish to merely positive, influenced by weaker-than-expected PMI data, which confirmed the ongoing economic slowdown.

Sentiment declined sharply at the onset of the week on Monday, following the opening of Pandora’s Box in Lebanon over the previous weekend and again in Iran on Wednesday, which effectively rendered the term "Middle East Peace" an oxymoron, like “Reagan’s Memoirs”. The rest of the week punching investors in the face.

Alongside escalating geopolitical tensions in the Middle East, investors were confronted with a barrage of adverse reports questioning the viability of the AI business model, with the hype on this highly popular theme disappearing almost overnight¹. How could this have happened? In two words: ignorance and arrogance – always a potent combination.

Adding to geopolitical and AI worries, US politics has emerged as a significant source of anxiety for investors. President Biden's lackluster debate performance against former President Trump on June 27 may have been a critical misstep for his campaign, however, Trump's contentious appearance at the 2024 NABJ convention on July 31st may have similarly jeopardized his prospects. Pollsters now indicate that Vice President Harris holds a slight () lead, whereas before Trump's combative demeanor on that day, the election appeared to be his to lose. This raises the possibility of another tight or inconclusive election result on November 5, which could lead to a heated battle over the final outcome and potentially plunge the country into political turmoil and civil unrest (think a nationwide replay of January 6^th 2021).

On the bright side, the Bank of England has lowered interest rates, and Fed Chair Jerome Powell has announced a shift in focus from the ongoing decline in inflation to the (weakening?) health of the job market as the key factor in future interest rate decisions by the FOMC. While monetary policy has dominated market sentiment over the past two years, it might no longer suffice as investors now seem to prefer any news, even bad, over uncertainty. This uncertainty is likely to keep sentiment low and lead investors to shy away from risk assets through the rest of the summer and into the fall unless political and geopolitical uncertainties become clearer. In short, this week’s correction isn’t the end, nor is it the beginning of the end, but perhaps it is only the end of the beginning.

If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

1 Washington Post: “AI is exhausting the power grid”, The next generation AI chips are delayed, and 70% of companies are behind in their AI plans. the Chief Investment Officer at Morgan Stanley warned investors that AI “hasn't really driven revenues and earnings anywhere.” One day later, Goldman Sachs quietly released a report admitting that the AI business model was in serious trouble. Consultant, Bain, recently shared a report detailing why AI projects have failed.

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.