AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Personal income, spending, and PCE price indexes, durable goods orders, consumer confidence surveys, and Q2 GDP revision. Earnings from Nvidia.

• Europe: ECB rate setting meeting minutes and Eurozone inflation data.

• APAC: China PMI and industrial profit data. Japan industrial production, retail sales, unemployment, consumer confidence, and Tokyo inflation data.

• Global: Investors will continue to focus on the direction of US interest rates after Powell’s speech at Jackson Hole, and any signs of the impact of tariffs on the global economy.

Over the past two weeks, investor sentiment has dropped sharply across almost every market we track, with only Global Emerging Markets managing to maintain a positive sentiment risk premium. Ongoing uncertainties—such as stalled peace talks in Ukraine, escalating tensions in the US-China chip dispute, and mounting concerns about the independence of the Federal Reserve—have made investors increasingly wary. Despite this, Powell’s uncharacteristically direct remarks on Friday regarding the likely outcome of the upcoming FOMC meeting sparked a widespread rally in US markets, driving them to record highs. Unless the upcoming PCE data delivers a negative surprise, the recent optimism about potential rate cuts could fuel a rebound in sentiment this week.

If last week represented anything, it represented contradiction. The direction of markets and sentiment have been at odds with each other for two consecutive weeks.  And on Thursday, the FOMC minutes gave investors a hawkish signal, stating that inflation risks still outweigh job market concerns for “almost all” board members at the July meeting, capping two weeks of negative news momentum. But on Friday, Jerome Powell delivered a dovish, almost Trumpian, speech opening the door for fresh interest rate cuts at the next meeting, which was kind of ironic, considering his previous insistence on being data-driven. At least I think that’s ironic. That word gets misused a lot.

The current divergence between rising markets and declining sentiment can be traced to the unpredictable nature of ongoing geopolitical tensions. With so many moving parts, no one knows where the global economy will settle once both known and unknown unknowns get resolved. Meanwhile, earnings, interest rates, and volatility: those things are tangible. Right now for investors, their fears of geopolitics feels like their fears of algebra in high school. So they go about investing as if geopolitics was only the third or fourth thing on their mind. The pull back in sentiment from bullish to neutral simply reflects how stressful investing like that can be because investors know that markets can call you on it at any given moment.

Confidence is the missing piece in investors’ current investment thesis — not the confidence to be bullish or bearish, but simply to commit. Sentiment has settled into a neutral zone, a reflection of investors simultaneously betting and hedging, hoping and fearing, deciding and second-guessing. They’re clinging to Powell’s “maybe” on rate cuts, quietly wishing it meant “definitely.” For now, they’re content to let interest rate direction steer the ship, postponing concern over what’s driving that direction. But both the economy and the Treasury markets are showing signs of strain under the weight of prolonged geopolitical tension and macroeconomic unpredictability. Soon, investors will have to confront a critical question: are rates being cut because the Fed has successfully tamed inflation — or because the economy and financial system need saving? 

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.