AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Manufacturing and services PMI data. Speeches by several Federal Reserve officials.
• Europe: Manufacturing and services PMI data for the Eurozone. Minutes from the last ECB interest rate policy setting meeting. Earnings from Home Depot.
• APAC: China industrial production, retail sales, housing prices, fixed asset investment, FDI, and a pivotal interest rate decision. Japan inflation and trade balance data.
• Global: Developments on the Ukraine-Russia peace talks and the US-Iran nuclear deal.

Investor sentiment continued to rebound from its April lows following the announcement of the Trump administration’s “reciprocal tariffs” on ‘Liberation Day’. As of last Friday, investors in China, Global Emerging Markets, and Japan were positive about the current market direction. Investors in other regions remained neutral, while European investors, still trailing their global counterparts, ended the week with a negative outlook, though this was an improvement from the bearish sentiment of the previous week. Looking ahead, the week is light in terms of scheduled announcements. However, as we have seen, it is often the unscheduled pronouncements from the Trump administration that drive sentiment.

The universal recovery in sentiment followed the announcement on April 9 of a ninety-day pause in the reciprocal tariffs, a hurried trade deal with the UK, and the start of talks between the US and China, resulting in a de-escalation of their mutual tariffs. These investor-friendly PR events allowed markets to recover most of the 20% fall incurred since the February highs. Still, despite a faster recovery in sentiment, the US market trails European ones both year-to-date and since the February highs.

Similar to the market reaction following the imposition of tariffs on Canada and Mexico, which also saw a (30-day) pause announced soon after, the Trump administration may have learned that, as the saying goes, “You can’t run away from your problems, but you can definitely put some distance between them and you." How about ninety days?

The US economy may have avoided a supply shock, because frankly, telling American children they can't have more than three dolls is like pulling the plug out of the bathtub and then telling the water it can't go down the hole. Try it and see what happens. The Chinese economy, for its part, may have sidestepped a demand shock, but European economies remain caught between Trump's protectionism and China's mercantilism. Investors' best-case scenario is that neither side should be allowed to win. The 90-day pause grants them that wish, but only for a short period and for investors, the only thing worse than not getting your wish is having it granted for just a little while.

On the geopolitical front, investors were hoping for the first face-to-face meeting between Zelensky and Putin since the war began. It was time for Trump to be applying the art of the deal to negotiate peace between Ukraine and Russia, rather than coveting thy neighbor’s plane or his sea views. However, Putin was a no-show, turning Trump’s Middle East peace trip into a lucrative business venture.

Sometimes, when people are nervous, they can't stop talking, even when they should, and say whatever jumps into their mind, even when they shouldn't. It's a bit abrupt to say “Europeans are nastier than China,” and Trump should put a sort of ramp against that comment to help EU leaders slide down from it with their face intact. European investors need to get used to the idea that America's foreign policy towards them is now being guided by mood swings rather than principles. This particular can has only been kicked down the road, not resolved.

By now, most Republicans in Congress must be thinking, "Let Trump sort things out with the voters.” It won’t be easy; they know that from years of battling with their constituents, who aren’t above voting them out when they're angry come the midterms. But more often than not with the MAGA crowd, Trump seems to get a pass just for being Trump. GOP members scoff at the injustice of his having acquired most-favored-nation status with Republican voters simply by being unpredictable, but if they can sail through the midterms on his coattails, they’ll put that in the “wins” column and move on. So, investors cannot expect them to stand up to Trump for the time being, but keep an eye out for primary challenges to incumbent Republicans for signs that the tide may be turning.

This week is light on macroeconomic data, and investors’ neutral mood is reflective of their need to wait for the first batch of macro data on the impact of the Trump trade policy uncertainty on consumers. Macro data is like that. Only after the blood has been spilled do investors see the blade.

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 ‘emotionally’ 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.