AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Fed Chair Jerome Powell’s testimony before Congress. PMI, PCE, durable goods orders, and balance of trade data.
• Europe: Eurozone PMI data. German consumer sentiment, Inflation data for France and Spain. UK Q1 GDP (final).
• APAC: China’s Standing Committee of the National People’s Congress meeting. Japan PMI, retail sales, Tokyo inflation data, and the BoJ minutes. Australia CPI data.
• Global: Any retaliatory strikes by Iran on US forces or regional oil infrastructure, the NATO summit, and any updates on global trade negotiations ahead of the July 9 deadline.

The balance between demand and supply for risk remained strongly positive, with investor sentiment ending the week bullish in six of the ten markets we monitor, and positive in another three. Only in Japan did investor sentiment drop from positive to neutral last week. However, this was last week. Everything changed over the weekend. As previously mentioned, positive sentiment often leads to an under-reaction to negative news. If there is no retaliation from Iran this week, markets might experience only mild profit-taking. Conversely, if Iran retaliates against US interests or regional oil infrastructure, causing oil prices to surge past $90 per barrel, sentiment will quickly deteriorate, resulting in an oversupply of risk compared to dwindling demand, which typically leads to rapid market declines.

The Two Trumps: Investors are starting to realize they might be dealing with two versions of Trump. Trump One is driven by confidence, while Trump Two is driven by an avoidance of guilt. Trump One threatens the sovereignty of Panama, Greenland, and Canada, while Trump Two offers to negotiate. When Trump One finds out, he raises the threat level via tariffs. Trump One orders mass deportations at work sites, but a few days later, Trump Two exempts farms, hotels, and restaurants. When Trump One finds out, he restores the original order.

Trump One launches a global trade war with punitive and reciprocal tariffs on friends and foes alike. Five days later, Trump Two pauses the threat for 90 days. Trump One finds out and decides to send out individual tariff notes to selected leaders behind Trump Two’s back. Trump One demands Iranians leave Tehran and calls for their leadership's "unconditional surrender," but Trump Two gives them an extra two weeks to negotiate a diplomatic solution. When Trump One finds out, the bombing starts right away (“Did I say two weeks? I meant two days.”). Trump Two then informs Iran that strikes would be contained, and that nothing further is planned. But then Trump One writes on Truth Social: “ANY RETALIATION BY IRAN AGAINST THE UNITED STATES OF AMERICA WILL BE MET WITH FORCE FAR GREATER THAN WHAT WAS WITNESSED TONIGHT.”

Investors have shown a strong preference for Trump Two. Trump One causes risk-off drawdowns, while Trump Two starts risk-on recovery rallies. As Trump One reports on the success of the bombing campaign, Trump Two stood behind him holding up a sign for Iran to lay down their weapons and negotiate peace. The question for investors now is, what is Iran’s next move? The ideal scenario for markets is that the regime contacts Trump Two to strike a diplomatic solution. Both Trumps say they want peace with Iran, but as we saw with in Ukraine, Iran’s next move may not be up to Trump.

The worst case is that Iran and its proxies retaliate against the US or the regional oil infrastructure, forcing Trump One to return and target regime change in Iran through “FAR GREATER FORCE”. The danger with that second (worst) option is that, as history has shown, regime change is not a finite process with a clear beginning, middle, and end. Khamenei may reach the same conclusion as Putin – that Trump lacks the resolve for a protracted war in the Middle East. Despite the claims of the Iran hawks in Trump’s administration, when it comes to regime change, closure is always ajar.

And, lest investors forget, as of today, June 23rd, we are 84 days into the 90-day pause in reciprocal tariffs, with one deal signed, 89 to go. Only 6 days remain until the pause ends on July 9th. The mostly positive sentiment in markets today was built during May and June on the hope that deals would be made in time to avoid the original tariffs being reinstated. Now may be a good time (not too soon, when they’re still in shock by the tariff threat, and not too late, when they have that ‘not-this-routine-again’ blues) for the EU and other partners (China bought itself more time) to strike a deal with Trump Two.

The clock is ticking on both fronts - tariffs and Iran - and expecting Trump One not to get involved is, in the words of Sir Elton John, “like trying to drink whiskey from a bottle of wine”.

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.