AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: PPI, retail sales, and durable goods orders for September.
• Europe: UK Chancellor of the Exchequer Reeves will publish the long-awaited Autumn Budget. Eurozone November inflation rates and major leading indicators measuring business and consumer confidence.
• APAC: Japan October labor market data and Tokyo’s CPI data. China’s October industrial profits and the official manufacturing and non-manufacturing PMI readings for November. Australia’s inflation data.
• Global: Geopolitical risk is back in the driver’s seat for sentiment this week with investors focused on the US-Venezuela, Japan-China, and Russia-Ukraine situations.

Investor sentiment continued to deteriorate last week, ending bearish across all five regional markets we track. Among individual markets, U.S. investors oscillated in and out of bearishness. In the U.K., sentiment dropped sharply from neutral to strongly negative ahead of this week’s Autumn Budget report. Japan shifted from neutral to negative as investors assessed the potential economic fallout from the new Prime Minister’s diplomatic clash with China. In China, sentiment weakened further on disappointing FDI data, closing on the cusp between negative and bearish. Overall, the imbalance between risk demand and supply is now deeply negative across most major markets, leaving them highly vulnerable to sharp downside overreactions if additional bad news emerges.

On the macroeconomic front, U.S. consumer sentiment in November remains the second-lowest on record, just above the June 2022 trough, as affordability concerns persist. The University of Michigan’s Current Economic Conditions Index plunged 12.8% to an all-time low of 51.1, driven by more than a 10% drop in consumer assessments of personal finances and durable goods buying conditions. News wasn’t much better for the world’s second-largest economy: foreign direct investment (FDI) into China fell another 10.3% YoY in October, extending a two-and-a-half-year decline. Meanwhile, Japan - the fourth-largest economy - has announced a stimulus package as its new administration braces for economic headwinds stemming from a diplomatic row with China.

Geopolitical risk is flaring up again, further weighing on investor sentiment. Sparks are flying between Japan and China, while the US and Venezuela appear locked in a high-stakes game of chicken. Meanwhile, after a dizzying cycle of threats, appeasement, renewed threats, and now another attempt at appeasement, Trump seems to have squandered much of his leverage with Putin - who has little reason to back down or concede any demands. Yet Trump is once again trying to sweeten the deal for peace - while simultaneously hinting to Zelensky that rejecting these new terms could invite retribution, possibly biblical in nature.

The dystopian divergence in Trump’s approach - pursuing peace in Ukraine while stoking confrontation in Venezuela - adds yet another layer of confusion for investors (and, dare we say, for the Nobel Peace Prize committee). It’s one thing to realize you’re shoveling against the tide; it’s another to abandon the effort before getting soiled - especially when you plan to keep shoveling against other tides. US voters may start to see both of these overseas efforts as a distraction from the administration’s failure to deal with the affordability issue at home. For them, it really is all about the economy.

With a holiday-shortened week in the U.S., trading volumes will likely be thin, leaving markets fragile. Sentiment is deeply negative, so investors don’t need a reason to sell - just an excuse. One adverse headline could ignite a sell-off into a market with few risk-tolerant buyers. That initial drop would cause a spike in volatility, forcing further de-risking and more selling, which drives volatility even higher - a self-reinforcing spiral that continues until selling pressure finally exhausts itself.

Investor takeaway: Conditions are primed for a volatility-driven cascade. Stay defensive, keep hedges in place – diversification strategy does not work in this environment - and avoid adding risk until the cycle breaks. 

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.