AXIOMA ROOF™ SCORE HIGHLIGHTS

Investor sentiment continued its upward trend, closing the week on a bullish note in eight out of the ten markets we monitor. This marks an improvement from the previous week, with sentiment in two additional markets (Global Developed Markets and the US) turning bullish. European investors, while becoming increasingly positive, did not quite make the bullish list. The only exception was Japanese investors, who remained neutral despite a rising market. Demand for risk now strongly outweighs supply, which should temper any reaction to negative news surrounding the upcoming tariff deadline on July 9.

NATO Summit: Trump, fresh from his TikTok fight with Iran, attended a NATO summit that was clearly designed to praise, appease, and entertain him to prevent an early departure. By turning themselves into a kind of Egyptian plover bird (which thrives by cleaning the detritus between crocodiles’ teeth),  the other members managed to secure his full support for NATO’s Article 5 collective defense clause - a commitment he had previously avoided. And even if the other members were just indulging him, who cares anyway, when the acting is that good? 

Iran: Is this it? Do we really know how it ended? In the short term - the only term Trump usually cares about - yes. Medium-to-long term, who knows. After finishing his victory lap, Trump told NATO he doesn’t think a nuclear deal with Iran is necessary. What do we know for sure? For Iran’s leadership, the lesson from this conflict is simple: the only way to avoid being bombed again is to become un-bombable by developing their own nuclear deterrent. Unless the regime publicly and verifiably abandons all requests for uranium enrichment, this isn’t over.

The Fed: Trump continued to berate Jerome Powel, whose term as Fed Chair officially ends next May, for the Fed’s decision to keep interest rates unchanged at their last meeting, calling him a "stupid person" and a "bad person". He also told reporters that “If I think somebody's going to keep the rates where they are, or whatever, I'm not going to put them in. I'm going to put somebody that wants to cut rates”. Interestingly, last week’s rate-setting meeting resulted in a widening divergence among the 19 Fed policymakers. Ten of them (and at least two who were clearly auditioning for the Chairman’s role next year) forecasted at least two rate cuts this year, but the number of officials who think the Fed won’t cut at all this year rose to seven, from four in March. This fight too clearly isn’t over.

Tariff Gate: The pause in reciprocal tariffs expires in just ten days, with only one deal signed and one temporary truce painfully obtained. Instead of negotiating more deals, Trump has opted to send ‘Dear John’ letters to each trading partner with a customized tariff rate. The letters will say, “Dear Country X, you’re going to pay a xx% tariff on your products to do business with America.” What it really means is, “Dear Country X, we’re going to charge American consumers xx% tariff to buy your products in America.” This fight is just getting started. 

In his book "The Art of the Deal," Trump advocates for using chaos and uncertainty as part of his negotiation strategy. He believes that creating a sense of unpredictability can give him an advantage by keeping his opponents off balance and more willing to make concessions when the time comes. While creating uncertainty and chaos might work in bilateral negotiations with a single supplier, applying this approach across multiple segments of a complex, symbiotically-sensitive economy - such as regulations, employment, taxes, trade, health care policy, immigration, and geopolitics - can turn the negotiating advantage of uncertainty against you by making it systemic, freezing economic activity. When uncertainty hampers the decision-making ability of consumers, corporations, regulators, and lawmakers, it becomes the very definition of an economic policy’s own goal.

Given the unpredictability of the Trump White House, why are markets hitting consecutive new highs, and investor sentiment so optimistic? The policy whiplash and lack of transparency in what comes next across so many inputs of investors’ decision-making models, has forced most of them to rely on their gut feelings instead, and frankly speaking, just between us girls, with so many critical questions left unanswered, many investors run the risk of coming to the conclusion that their gut has shit for brains.

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.