AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Personal income and spending, the PCE price indices, durable goods orders, goods trade balance, and the 2nd estimate of Q1 GDP growth. Earnings from Nvidia and Costco.
• Europe: Inflation figures from France, Spain, Italy, and Germany. German consumer confidence data.
• APAC: Japan industrial production, retail sales, and consumer confidence figures. Australia CPI data.
• Global: Israel-Iran tensions as US-Iran talks falter. After Apple, any other big Tech tariff targets?

Investor sentiment has now completely recovered from its April fall, ending the month of May where it was pre-Liberation Day (April 2^nd). Sentiment has soared to new highs for the Trump 2.0 Era in all regions except Australia, Global Developed ex-US markets, and Europe. The May relief rally, driven by the 90-day deferment of reciprocal tariffs, led to a complete reversal of April's trends, when both markets and investors were 'tariffied' by the ongoing trade war. Whether this recovery persist in June ahead of the July 9 deadline, will depend on how many trade deals are signed between now and then.

Investors will be tuning in for this week's episode of “The Art of the Backdown”, predictably entitled “Up Markets”. The Q1 earnings reporting season is wrapping up with a bang, thanks to Nvidia, and has generally exceeded expectations. Profits grew by 13%, compared to the anticipated 7% growth according to Factset, boosting both markets and sentiment. However, the uncertainty surrounding the Trump administration’s trade policies has left CEOs and investors unable to predict earnings for Q2, never mind the next few quarters. At the current high valuation levels (PE >20x), investors are likely to demand signed trade deals and a commitment from the Trump administration to honor them before sentiment or markets can rise further from current levels.

Why Europe? And why Apple? The answer is simple: China. Trump aims to pressure China to change its economic model, which currently relies on exporting its way out of a slowdown by flooding other markets with cheap (subsidized) goods. So far, China has responded to US demands with calm but has directly warned other countries against making trade deals with the US at China's expense. The issue is that if the EU sides with the US, China cannot afford to lose both the US and EU markets for its exports by retaliating too harshly against Europe – that would be an economic own goal. 

Europe is likely to find areas where it can align with the US, such as steel and EV imports from China. However, it will need to navigate carefully with Beijing to avoid becoming collateral damage in the US-China trade war.

The uncertainty from the trade war stems from the 'lost-in-translation' effect of two orthogonal negotiating styles clashing. Europe and China employ highly regulated approaches - Europe for compromise across its 27 member states, China for control - while Trump operates without a rule book. If thinking inside the box were an Olympic sport, the EU and Xi would have more gold medals than Michael Phelps. Trump is simply leveraging their need for predictability by being unpredictable.

The challenge for investors and CEOs is that markets and the economy require a degree of predictability to function efficiently. The uncertainty from the trade war impacts their ability to forecast unemployment, inflation, monetary policy, and fiscal policy - all crucial elements of any investment strategy. Given that expecting Trump to change is unrealistic, investors must determine just how much uncertainty they are willing to tolerate. Regardless of the level, they are likely to follow bond traders and demand an additional risk premium to remain invested in equity markets. This risk premium will become immediately payable at times when investors are bearish, so keep a close eye on sentiment for signs that it’s time to wear a swimsuit.
 

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.