AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Manufacturing and Services PMIs, speeches by Fed officials, factory orders, the jobs report, and foreign trade data.
• Europe: ECB rate decision, Eurozone inflation, and foreign trade for France and Germany.
• APAC: China manufacturing and Services PMIs, Japan household spending for April.
• Global: Latest version of a US-Iran nuclear deal is on the table for Iran to sign.

Investor sentiment continued to recover, mirroring the TACO rallies seen across all markets since Trump's April 9 pause on tariffs. By the end of May, investors were bullish in Australia, China (boosted by hopes of further stimulus), the UK, and Global Emerging markets. Sentiment was positive in Asia ex-Japan, Japan, the US, and Global Developed markets. However, sentiment in Europe and, consequently, Global Developed ex-US markets remained neutral, as investors there awaited the commencement of trade negotiations between the EU and the US. 

But, as the saying goes, what goes up must come down. Will the TACO bubble burst in June? The Trump administration is waging a tariff war on two fronts: externally with trade partners and domestically with the courts. Last week, the focus was on the domestic front, with one court declaring his reciprocal tariffs illegal on Wednesday, another court allowing them on Thursday, and Trump announcing on Friday that he would double the previous (legal) tariffs on steel and aluminum to 50%, effective Wednesday, June 4th. 

Externally, the US-China détente reached in Geneva in early May seems to have broken down. On Wednesday, Secretary of State Marco Rubio announced plans to cancel the visas of all Chinese students in the U.S. Treasury Secretary Scott Bessent called China an unreliable partner, and Trump himself, in a Truth Social post (unilaterally) announced that China had broken their deal. Add to this a hidden ‘revenge tax’ slipped into Trump’s “Big Beautiful Bill” that would give the U.S. power to impose new taxes of up to 20% on foreigners with U.S. investments. Negotiations will remain deadlocked until an eventual Trump-Xi meeting, which the U.S. side says is to happen soon. Publicly blasting China, calling them “unreliable” and “cheats,” isn’t going to give Xi a sense of urgency for this meet-cute.

The worst-kept secret of the Trump administration is that all trade deals are designed to force other countries to pick a side: the U.S. or China. Trade negotiations with the U.S. leave leaders of other countries caught between choosing to remain neutral at the risk of upsetting Trump or upsetting China by pleasing Trump. It’s no wonder few are eager to start negotiations or sit in the Oval Office in front of cameras, with the floor still littered by the PR corpses of leaders from Ukraine and South Africa.

Paradoxically, the TACO rally in the US took place on declining volumes (see chart 27 in the equity risk monitors). The 20-day average USD trading value for assets in the Russell 1000 declined throughout May as investors fretted over the rising uncertainty from the continuous on-again/off-again tariff pronouncements by the Trump administration. For investors on the sidelines, there is no more FOMO, and although most are happy to see the market rise and the margin calls end, they remain glad not to have to deal with the high uncertainty that is now a permanent feature of markets (living in Singapore, I feel the same way about the sun - I can only enjoy its presence when sitting in an air-conditioned room looking out).

For some, mainly foreign investors, jumping back into the U.S. market feels like arriving at a party when everyone else has left. For others, mainly short-term contrarians, the volatility that comes with Trumpian uncertainty is a welcomed opportunity for speculative gains. Exchanges thrive on this harmony of opposites. Most conservative investors would leave, but not speculators - they have stubbornness issues.

Given the lack of success from both his geopolitical agenda and the trade agenda so far, it is hard to understand why the GOP still blindly supports Trump's policy whims. Perhaps it’s related to the old Woody Allen joke: “This guy goes to see his therapist and says, ‘Doc, my brother’s crazy! He thinks he’s a chicken.’ And the doctor says, ‘Why don’t you have him committed?’ And the guy says, ‘I would, but I need the eggs.’”

Return is a lot more contextual than investors will admit. The same strategy in a different context will not have the same return. Investors are used to dealing with uncertainty by “skating to where the puck is going to be, not where it has been”. However, today’s context is like playing a game of ice hockey where there are three pucks on the ice at once, each moving unpredictably. Navigating this environment requires the ability to adapt quickly to constantly changing conditions.

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.