AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Due to shutdown, private data dominates: weekly ADP employment figures and the NFIB Small Business Optimism Index. Earnings from Cisco, Disney, and Applied Materials.
• Europe: Eurozone industrial production data. UK GDP, unemployment, and industrial production data.
• APAC: China’s industrial production, retail sales, property prices, and credit aggregates data, as well as earnings from Tencent and Alibaba. Japan’s GDP estimate and earnings from Softbank and Sony.
• Global: Ongoing economic impact of US Government shutdown, and developments in Venezuela, Ukraine, and the Middle East.

Investor sentiment continued to deteriorate over the past two weeks, even as markets moved higher. Sentiment ended bearish in Asia ex-Japan, Europe, Global Developed ex-US, and Global Emerging Markets. Investors remained negative in China, Global Developed markets, and the US. Only Australia and the UK maintained positive sentiment — though both have been prone to sharp mood swings recently. Globally, the disconnect between investor sentiment and market performance is widening, reaching unsustainable levels in several markets where the imbalance between the demand and supply for risk has turned dangerously negative. The past two weeks were dominated by Trump news, both domestically and internationally, and he looks set to continue shaping sentiment this week.

Trump’s tariffs set into motion the law of unintended consequences (inflation remains well above target and a softening jobs market), along with the cruel laws of irony (allies facing higher tariff rates than foes) and paradox (some US auto makers are considering moving parts of their supply chain to China to neutralize their rare earth dependency). Domestically, voters in NYC, New Jersey, Virginia, Pennsylvania, and Georgia, attempted to send the Trump administration a message last week. For their part, markets reacted as if you couldn’t very well start lecturing Trump now – there is every reason to believe that the first 78 years of his life had been the formative ones.

The Trump-Xi meeting on October 30^th in Busan, originally scheduled for three hours, wrapped up in just 90 minutes. Factor in time for translation, and you’re left with about 45 minutes of actual dialogue — shorter than a standard laundry cycle. Still, Trump and Xi were seen shaking hands more or less successfully, since suspicion and resentment are hard to convey through the medium of palms. As far as investors are concerned, the meeting resulted in a de-escalation of risks, a minimalist ‘do no (more) harm’ result they found difficult to credit to either Trump or Xi, though impossible to deny. 

Trump went into the meeting holding nothing but a pair of Twos, hoping to reach a comprehensive trade deal on “rare earth, soybeans, Russia, maybe even nuclear – everything” - he failed. For his part, Xi was hoping for a truce to buy time and build leverage - he succeeded (note to Trump: the fight with China isn't a one-to-one fight, it's a many-to-one fight).

Trump seems certain that Venezuela’s Maduro is in league with the devil, although he doubts that he is very far up in the satanic hierarchy. Openly displaying six stealth bombers in Diego Garcia back in April didn’t bring Iran to the negotiating table. Will showcasing the largest U.S. military presence in the Caribbean in decades — including the USS Gerald R. Ford (CVN-78), the Navy’s most advanced aircraft carrier, and its formidable Carrier Strike Group — bring Maduro to the table, or will he call Trump’s bluff? 

All of this — the tariffs, the paradoxes, the poker hands — has left investors facing a landscape shaped more by geopolitics than fundamentals. Risk tolerant investors pride themselves on a high threshold of loss. Loss, they’ve learned over the years, would peak, and from that point forward it would get no worse. What you looked for was the moment when the loss peaked and you realized your portfolio could stand it, that it wouldn’t kill it. But loss (a.k.a. “drawdown”) can have a cumulative effect, and a portfolio’s ability to withstand it has much to do with its ability to catch its breath between assaults (a.k.a. “drawdown duration”). This year has seen one big loss (a.k.a. “Liberation Day”), peaking on April 8^th, followed by a long, AI-fueled rally that’s given portfolios a chance to catch their breath. But investors may need to store that breath for what’s coming in 2026, as the uncertainty unleashed by Trump’s second term shows no signs of easing.

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.