AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Fed Chair Jerome Powell’s speech and Q2 Earnings from Alphabet, Tesla, Verizon, Coca-Cola, AT&T, T-Mobile, IBM, Raytheon, Texas Instruments, and Lockheed Martin, Coca-Cola, Philip Morris, and Blackstone.

• Europe: ECB rate setting meeting and Eurozone consumer confidence data.

• APAC: PBoC rate setting meeting and H1 industrial profit data for China. Japan manufacturing PMI and Tokyo inflation data, and upper house election results.

• Global: Further trade negotiations and any potential agreements between the US and its key trading partners ahead of August 1^st.

Investor sentiment remains resiliently bullish despite looming tariff deadlines, with a notable positive sentiment risk premium observed in six of the ten markets we track—namely Asia ex-Japan, China, Global Developed Markets, Global Emerging Markets, the UK, and the US. Sentiment also held positive in Australia, Europe, and Global Developed ex-US markets. In contrast, sentiment in Japan was mixed, influenced by the lack of a trade agreement with the US and anticipation surrounding a key Upper House election this weekend, which could result in a populist shift disrupting the political status quo. Overall, except in Japan, investor sentiment continues to support the current market rallies across global markets.

The Trump administration has announced plans to impose 30% tariffs on Mexico (accounting for 15.3% of its trade) and the EU (accounting for 18.3% of its trade) starting August 1st, unless these trading partners agree to the America First (and America Only) deal presented to them. This led Maroš Šefčovič, the EU’s trade commissioner, to warn that “If (the tariff) stays 30 (percent) plus, simply trading as we know it will not continue, with huge negative effects on both sides of the Atlantic”. Despite this looming economic threat, investors have chosen to disregard it, banishing the thought into the far corners of their minds where they store other thoughts they’d rather not to think about - like death and taxes – as doing so allows them to function in the present without being depressed by them.

What might appear as investor complacency or speculative trading could actually be an acknowledgment that allowing economy-depressing tariffs to take effect and slow down the economy would reduce government tax revenues and increase the number of unemployed workers seeking federal assistance. This scenario would erode much of the gradual savings from lower interest payments on the bulging national debt once the Fed begins cutting rates again, which is currently not anticipated to happen until their September 17 FOMC meeting. Given tariffs’ impact as a consumption tax on the economy, investors have chosen to believe this is a threat Trump is unlikely to make good on, for now.

Markets are flirting with record highs, even as global trade tensions, inflation, erratic policy shifts, geopolitical flare-ups, and military conflicts swirl in the background. Volatility remains eerily subdued - almost suspiciously so. It all has the feel of a bubble in the making: a heady mix of uncertainty and complacency inflating it, with sentiment that euphoric it might as well be running on nitrous oxide.

Investors seem convinced that trade deals will materialize - if not before the deadline, then surely after yet another extension. And once a deal is inked, the narrative goes, the worst will be behind us. Trade relations between the US and its partners will be a clean slate, the past (deficits) wiped away, the future yet to be written. 

But few investors will admit just how much guesswork underpins their assumptions about the whens and whats and with-whoms of all this negotiating. With less than two weeks to go before the August 1 deadline, all they’ve seen is a meeting here and a meeting there, but in the end, no deals done. So how does one reconcile soaring sentiment with such deep uncertainty? How do you square that circle?

For now, investors are clinging to TACO as the catch-all answer. Complacency, after all, is a progressive, highly infectious condition. It sneaks up on you so subtly, so insidiously, that investors don’t realize they have fallen into its grip until long after the fact.

Sentiment moves through markets like the tide - sometimes pulling back (as in March), sometimes surging (as it is now) - but always reshaping risk tolerance in inexorable ways. The big question for investors now is: what could realistically pop this complacency-driven bubble, inflated since the April 9 pause in reciprocal tariffs? This is the thought they have chosen to banish from their minds - for now.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the ten 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.