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AXIOMA ROOF™ SCORE HIGHLIGHTS

WEEK OF SEPTEMBER 09, 2024

Potential triggers for sentiment-driven market moves this week

  • US: CPI and PPI inflation data and the Michigan consumer confidence figures.
  • Europe: ECB interest rate decision meeting (25bps cut expected) and guidance for the rest of the year. Trade balance and industrial production for the Eurozone.
  • APAC: China’s trade balance for August, inflation, and new Yuan loans data. Over the weekend, China will also release data for industrial production, retail sales, FDI, unemployment, and the house price index.
  • Global: The lack of clarity on the economic situation across major economies (US, EU, China) and expectations of the first US interest rate cut will continue to drive sentiment this week.

Insights from last week's changes in investor sentiment:

This week, investors’ mood remained largely stable, with a bearish outlook persisting in Asia excluding Japan, Global Developed excluding the US, and Global Emerging markets. Sentiment stayed negative in Global Developed markets and Europe, while Japan and the US maintained their neutral stance. The recently positive mood in China endured another week, while investors in Australia recovered their bullish feeling last seen in July. The large dispersion in investor sentiment across the world reflects the prevailing uncertainty, fueled by inconsistent economic indicators and a packed schedule of forthcoming events. These include crucial interest rate decisions from the ECB and the Fed, set to take place this month, amidst ongoing geopolitical tensions in Gaza and Ukraine, and a too-close-to-call US Presidential election race.

Uncertainty, not risk or return, has been in the driver’s seat for markets since July 21, when in the US, the Democratic ticket sent all Americans a parental note saying “Dear Voter, please excuse Joe Biden from this year’s election, for obvious reasons”. In politics, admitting you’re not up to the job you just recently applied for is like bleeding in shark-infested waters. After seemingly running away with the election, Donald Trump and the Republican party now find themselves behind in a very tight race. Voters from both parties are united in their need for leadership and character, and in their pursuit of substance in a time of ever-increasing evanescence. But for now, watch either side’s political rally without sound, and it quickly feels like a documentary on the hydraulics of insincere smiles.

The economy, the economy stupid, the new American voter's obsession: espoused as the most important issue, marketed as the most fragile construct, and pronounced dead twice a week. Each party says that both big brother and his little brother, the Federal Reserve, are threatening it with their overbearing almost obsessive compulsive policies. Barbarians (a.k.a., Pivoteers) have been laying siege at the gate of the Fed for a long time (18 months!), but the besieged themselves have been the last to take it seriously, until now, and on September 18th investors will find out just how much. But not before.

Add to this uncertainty about politics and the economy the recent precariousness of the AI revolution. For the second consecutive first week of the month, investors who used to believe in everything AI (i.e., Nvidia) no longer even apologized for having stopped. Ditto for those who believed the carry trade was a safe bet.

What does this mean for markets? The continuous quantitative easing (QE) over the past twenty years has shifted investor mentality from simply understanding that the Fed can help rescue them from financial ruin to the conviction that the Fed must rescue them every time, no matter the circumstances. This unwavering belief may temporarily stabilize markets (except Japan), as each reduction in interest rates is quickly succeeded by demands, for yet another, and another, and another after that. Pretty please. 

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.

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