AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: PPI and CPI data and the preliminary annual benchmark revisions to nonfarm payroll numbers.
• Europe: ECB interest rate decision. Industrial production data for Germany, France, and the UK.
• APAC: China August trade, CPI, and PPI data, as well as possible new policy announcements following the National People's Congress Standing Committee meeting. Japan’s final Q2 GDP numbers, August producer inflation, current account data, machine tool orders, Reuters Tankan results, and manufacturing sentiment surveys.
• Global: Focus will be on US inflation data and the specifics of any new secondary sanctions imposed by the Trump administration on Russia and its trading partners.

Investor sentiment rebounded slightly last week, ending a month-long decline, as renewed hopes for lower U.S. interest rates lifted most markets. However, sentiment in European and Global Developed ex-U.S. markets remained unchanged, reflecting their heightened sensitivity to tariff negotiations rather than monetary policy—especially now that the ECB is widely believed to have concluded its rate-cutting cycle. Japanese investors stayed bearish, though slightly less so than the previous week, as leading indicators continue to signal a slowing economy. Sentiment in Global Emerging Markets returned to bullish territory, driven more by a decline in risk aversion than by increased speculative appetite. Across all markets, the balance between the supply and demand for risk is near equilibrium, suggesting a lack of emotional bias ahead of this week’s U.S. inflation data and next week’s FOMC meeting.

Sentiment remained directionless this week, as investors continued to favour the more risk-averse segments of the market. Yet, the decline in market risk isn’t prompting them to actively de-risk their portfolios. These two opposing forces are keeping sentiment in a neutral state for now.

Looking ahead, there’s little that hasn’t already been priced in. A 25 bps rate cut at next week’s FOMC meeting is widely expected, with one or two more likely by year-end as signs of a slowing U.S. economy accumulate. Investors have decided to punt on the issue of Fed independence for now.

Geopolitics, with its binary nature, makes forecasting a confidence game investors are reluctant to play. Instead, they find themselves caught in a loop of self-doubt, hoping that tomorrow will bring clarity. But while things may look different in the morning, that doesn’t mean they are different. And the answers that might help are precisely the ones they cannot access—leaving them without a strategy suited to the current environment.

As a result, sentiment is likely to remain cautiously neutral until the news cycle shifts toward issues that are specific and objective, rather than general and subjective. Even in a low-risk environment, where the cost of being wrong is modest, caution is a poor substitute for accuracy—and an even poorer proxy for insight. Investors want answers, but are not demanding them yet (i.e. their cautious stance is driven by a want, not a need).

The month-long divergence between declining sentiment and rising markets has eroded the positive sentiment risk premium that supported July’s rally. It now feels as though geopolitics is the Rosetta Stone investors are trying to translate—and the low volatility levels suggest that they are not looking to sentiment for help. 

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.