AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Manufacturing and Services PMI data, balance of trade, and the Jobs report.
• Europe: Eurozone inflation and retail sales data. Europe’s legislation of technology platforms and tax on technology services which could restart a wave of US tariffs and EU retaliation.
• APAC: China’s Shanghai Cooperation Organization summit, PMI data, and any new details on further stimulus measures. Australia’s Q2 GDP.
• Global: The trade war truce of July seems to have ended in August with coalitions forming to potentially resist (India-Russia-China) or potentially retaliate (France-Germany-EU) against US tariffs whose legality has now been questioned by a Federal court in the US.

Investor sentiment continued to weaken last week across all markets we monitor. Only Global Developed ex-US, Asia ex-Japan, and US investors maintained a neutral stance. The positive sentiment risk premium observed in July has now been fully eroded in August, with Japan showing signs of a negative sentiment risk premium. With the earnings season behind us, investor sentiment is now being shaped by macroeconomic and geopolitical factors. Factual analysis is giving way to counterfactual speculation. While there is greater clarity around the trajectory of US interest rates, it is being overshadowed by growing uncertainty around global trade, economic growth, and the deepening decoupling between the world’s two largest economies. As the global landscape shifts toward a multipolar order, emerging alliances are increasingly competitive, complicating efforts toward peace and stability. 

Throughout August, market direction and investor sentiment have been moving in opposite directions, raising a fundamental question: which one is the true leading indicator? Markets, earnings, and the broader economy have been powered by massive investments in AI technology and infrastructure. Yet investors remain uncertain about the potential fallout from the Trump administration’s trade war, immigration clampdown, and efforts to undermine the Fed’s independence on the broader economy and inflation. For now, they view the AI narrative as their final line of defense - an anchor of conviction in an otherwise uncertain future.

Investors rarely buy together driven by the same dreams or aspirations, but they almost always sell together when haunted by the same nightmares. The fear of a disruptive trade war surged in March and early April, then eased through May and June, reaching a low in July as several trade deals were announced. But those fears resurfaced in August, fuelled by the lack of clarity around how those deals would be implemented, mounting legal challenges at home, and the emergence of ‘coalitions of the unwilling’ abroad. India, Russia, and China are deepening economic ties, while Europe is pushing back against what it sees as US attempts to bypass EU sovereignty over tech platform regulation. Even Canada, where, beer commercials tell us everything is pure and clean, seems to be banding together and reaching out to Europe and Australia for economic ties. The growing concern among investors is whether the July deals will unravel in September, bringing back the spectre of Liberation Day tariffs.

Looking ahead to this week, risk tolerance and risk aversion appear to be in a delicate balance, though most markets lean slightly negative, with Japan showing a more pronounced bias. Geopolitical concerns are likely to dominate the early part of the week, giving way to macroeconomic focus as US PMI data and the Jobs Report land in the final two days. Investors should brace for a flurry of tweets and a fair amount of soul-searching, but for now, the equilibrium between potential supply and demand for risk suggests markets will remain range-bound.

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.