AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Fed’s interest rate decision, retail sales, and industrial production data. Further escalation in the protesters-versus-ICE/Federal Authorities standoff.
• Europe: UK CPI data and BoE interest rate decision.
• APAC: China industrial production, retail sales, fixed asset investment, unemployment data, and BoC interest rate decision. Japan trade and machinery orders data, and BoJ interest rate decision.
• Global: Escalation of Israel-Iran war into a regional conflict, the G7 Summit in Canada, and any progress on trade negotiations.

Investor sentiment remained relatively stable compared to the previous week as investors evaluated the implications of the onset of direct hostilities between Israel and Iran on global markets. The recent positive-to-bullish mood and the favorable supply-and-demand balance for risk assets at the time have contributed to the subdued market reaction so far (as of this writing the Nikkei has already recovered all of the initial dip). However, if the conflict escalates into a broader Middle East war, potentially impacting regional oil facilities or transport through the Strait of Hormuz, investor sentiment is likely to shift, leading to a downturn in the markets. 

Trade War: With only one out of 90 trade deals signed so far, there was hope that this week’s G7 meeting in Canada would result in more agreements. However, investors were skeptical about the outcomes of a G7 meeting when the most influential member behaves like a G1 and wants the other six to change. Other invitees to the Summitt include Australia, Brazil, India, Mexico, South Africa, South Korea, and Ukraine. Notably absent from this list is China, and Xi will be wondering if not being at the table, means you’re probably on the menu.

US-China: Details of the recent US-China trade talks are few after Howard Lutnick’s Seinfeld press release – a press release about nothing – announcing they had agreed on a framework to recover the framework they had previously agreed on, again. This six-months truce will allow shipments for rare earth magnets to resume for civilian end-users, not military ones, and only for US companies. The US-China relationship has now slipped into a bareknuckle supply chain warfare, and for now, both sides have simply agreed to extend the pretend.

Actual wars: Trump commented that he hoped there would be a deal between Israel and Iran to stop the hostilities, but that  “sometimes they have to fight it out.” This was a similar comment to the one he made about the prospect for peace between Russia and Ukraine last month. It seems that in order to mask the lack of success on this key campaign promise, Trump has gone from dying for peace deals, to being unopposed to war.

The Fed: Investors place immense value on a central banker’s reputation for independence. To them, it’s everything. A Fed Chair may have impressive credentials, but without a strong reputation for independence, those credentials mean little. Last week, Trump once again attempted to pressure Jerome Powell into cutting rates by a full 100 basis points, demanding it be done "now." Despite this ‘suggestion’, the Fed is likely to keep rates unchanged at their Wednesday meeting. As we saw when Trump previously threatened to fire Powell (despite lacking the authority to do so) for not cutting rates quickly enough, trust in the Fed’s independence is crucial for investors. Undermine that trust, and markets will crash. It’s the sniper on the roof.

Investor sentiment is currently bullish in four markets (Australia, China, Global Emerging Markets, and the UK), positive in another five (Asia ex-Japan, Global Developed Markets, Global Developed ex-US Markets, Japan, and the US), and neutral in only one (Europe). This favorable balance in the demand-and-supply for risk suggests that it would take a significant escalation of the Israel-Iran conflict into a regional war for investors to abandon the positive investment thesis they have adopted since the pause in reciprocal tariffs was announced on April 9. 

Trade was expected to be the main focus of this week’s G7 Summit, but the conflict between Israel and Iran is likely to dominate discussions. The pressing need for peace in both Ukraine and the Middle East could either unite the G7 or exacerbate their differences. Still, given the current positive sentiment, it will take a very public display of discord to shake investors’ positive bias that the worst of the trade war is over and that new deals will be made to rebalance global trade in a positive direction for markets. 

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.