AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: No data releases until shutdown ends. FOMC minutes, and consumer sentiment.
• Europe: Germany and Italian industrial production and the Eurozone's retail sales.
• APAC: LDP leadership election results (Takaichi) brings hopes for a return of Abenomics.
• Global: Peace process in Gaza and increased threats to NATO from Putin in Ukraine.

Investor sentiment continued to rebound last week, largely thanks to a steady decline in risk aversion—except in the UK. There, investors had shown a genuine appetite for risk in September, but dialed back their enthusiasm somewhat last week. Globally, investors are less negative, but still not confident enough to shift beyond a neutral stance. Only those in the US, UK, and Global Developed markets managed to edge into slightly positive territory.

In Japan, investors remained neutral in a wait-and-see mode ahead of the weekend’s LDP leadership election, which saw (on her third attempt ) the election of Takaichi, the party’s first female leader and a known follower of Abenomics. That outcome should give sentiment a lift this week. Meanwhile, Chinese markets remain closed until Wednesday.

In the US, Q3 ended without the economy going into recession, without a tariff-led inflation surge, without unemployment soaring, and with the Fed resuming its interest rate cutting cycle. There was much for investors to be thankful for, even if the balance of things still to come remains too precarious to inspire confidence. 

Q4 begun with the uncertainty of a government shutdown, the increasingly authoritarian standoff between Blue cities/states and the White House/DHS, ongoing drug enforcement ops off Venezuela’s coast, and a packed Supreme Court docket in Q4 that could see Liberation tariffs revoked or further erosion of the Fed’s independence; it’s no wonder investors are hesitant to lean in.

Globally: Investing is forecasting. An endeavor in which hope and knowledge are going at it, bare-knuckled, equally and eternally matched. Unresolved geopolitical tensions are making this an unfair fight. Meanwhile in Ukraine, the message from Putin to NATO seems clear: "No threats, no aid, no fussin’ around—just good ol’ trust while I tear Ukraine down”. Worst Country song ever!

On the local politics front, the world continues its slow but relentless right turn. Elections in both the Czech Republic and Japan saw right-wing candidates come out on top. These outcomes could lead to reduced support for Ukraine from the Czech side, and a more assertive stance toward China from Japan. In the short term, however, both wins are likely to be welcomed by equity markets as both candidates ran on dovish reflationary platforms.

In Europe, the dismal approval ratings of leaders in the UK, France, Germany, and the EU make a strong, unified policy response to the US, China, or Russia unlikely. Each leader is facing growing pressure from their domestic right flank, with rising calls for change. But for investors, it’s a familiar story—plus ça change, plus c’est la même chose. And with no major elections due until 2027, la même chose is likely all they’ll get.

As of last Friday, risk aversion and risk tolerance were in balance across most markets, indicating that investor sentiment currently carries no risk premium. It’s not that investors have nothing to worry about—it’s that they can’t do much about those worries, nor can they reliably predict how things will unfold. So, they’ve chosen not to try. Instead, they’re focusing on the tangible: interest rate cuts, a resilient economy, and the upcoming Q3 corporate earnings season, which kicks off next week.

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.