AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: The US Q3 earnings season gets underway with major banks including Citigroup, Goldman Sachs, JPMorgan Chase, Wells Fargo, Bank of America, Morgan Stanley set to report results amid an ongoing absence of official economic data releases as the US government shutdown enters its third week.
• Europe: Eurozone industrial production, the final inflation reading, Germany’s ZEW sentiment index, and UK labour market and GDP data.
• APAC: China inflation, and banking activity data. Japan’s political development as it attempts to name a new Prime Minister
• Global: Focus will be on whether the latest developments between the US and China have derailed a planned Trump-Xi meeting on the sidelines of the APEC summit later this month.

Investor sentiment closed the week in a holding pattern—dead neutral across all markets we track, except Japan where investors turned negative after the political fallout between the LDP and Komeito parties. It is as if investors globally are saying “We don’t know what’s going on between you two (US and China), but we don’t like it one bit”. Except in Japan where they seem to be saying “We don’t know either, but we have our own leadership vacuum to deal with”. Right now, the market shows a perfect balance between the supply and demand for risk—there’s no sign of a sentiment-driven risk premium anywhere, except in Japan, where risk aversion is climbing rapidly. This week, ‘tariffied’ investors will be watching closely for any sign that the much-anticipated Trump-Xi meeting—initially floated for this month’s APEC summit in South Korea—is back on. Historically, tensions tend to ease once the two leaders sit down and talk. Investors are hoping this latest speed bump in their relationship follows its familiar cycle: from trade war, to trade framework, to trade deal.

In the months following the April 4 Liberation Day tariff scare, investors reached a familiar conclusion: while Trump may not be like any president before him, he is always like himself. With that in mind, they were content to let Trump be Trump, operating under the assumption that after the initial chaos, conditions would eventually swing in their favor. But then came the threat of a hard decoupling between the world’s two largest economies - whether imagined or merely implied - which sent shockwaves through financial markets. At this point, it’s difficult to imagine the US-China relationship generating anything but persistent geopolitical headwinds for years to come. Acceptable, perhaps, had investors exhibited any signs of patience, but on Friday, they appeared singularly lacking in that particular diplomatic virtue.

Adding to investors’ unease is the ongoing U.S. government shutdown, which seems to be growing more combative by the day rather than moving toward a negotiated resolution. The lack of official data during this period—most notably, the inflation report now delayed by two weeks—has opened the door to speculation. It’s the classic paradox: if inflation rose/fell last month but there’s no government employee available to release the data, did it really rise/fall? 

The absence of data means neither good nor bad economic news is being released, which helps explain why investor sentiment remains neutral. It also underscores a deeper issue: the ongoing erosion of trust, as world leaders across the board continue to paint a more chaotic picture for investors. Forecasting becomes nearly impossible in such an environment, and confidence takes another hit.

The Q3 earnings season kicks off in the U.S. this week, starting with the big banks. While official results will matter, investors are likely to pay closer attention to any forward guidance from CEOs for clues on how they are navigating the current uncertainty. In other news, Treasury Secretary Scott Bessent has released a shortlist of five candidates to replace Jerome Powell as Fed Chair next May: Michelle Bowman, Christopher Waller, Kevin Hassett, Kevin Warsh, and BlackRock Fixed Income CIO Rick Rieder. No major surprises there, but investors will also be watching to see whether Powell steps down entirely or remains on the Fed Board as a voting member. Never a dull moment here in the House of Trump. Investors may not be properly informed, but they can at least count on being entertained.

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.