Investor sentiment ended last week unchanged across all the markets we follow except in Asia ex-Japan where sentiment turned bullish from positive the previous week. Investors have now turned bullish in three markets, Asia ex-Japan, Global Emerging Markets, and the UK, the latter on better-than-expected GDP numbers suggesting their economy may have bottomed out. But while it is nice to feel bullish, it is worth considering whether feeling bullish and being bullish are actually the same thing. After sharp consecutive drops in the US last week, Asia ex-Japan markets reacted in kind, not out of sympathy so much as like being scalded while in the shower because one of the neighbors on your floor just flushed their toilet.
The lack of change in sentiment over the past several weeks reflects the ongoing uncertainty (and repeated disappointment) about monetary policy as well as the volatile geopolitical situations in both Ukraine and the Middle East. The absence of an emotional response to date suggests that investors are simply becoming comfortable being uncomfortable. Geopolitical risk having gone unmentioned for so long, it may have become unmentionable in their mind. CEOs have only obliquely referenced the topic in the first batch of earning reports.
The recovery in US investor sentiment remains choppy since briefly turning bearish in early March. The third consecutive hotter-than-expected monthly inflation report delaying any hopes for an early rate cut by the Fed and fears of a widening conflict in the Middle East have pushed sentiment back into negative territory (from neutral) last week. Investors continue to use monetary policy as the lens through which they look at everything, turning markets into a litany of Fed rejections.
Despite ongoing macroeconomic and geopolitical challenges, investors have remained surprisingly calm, almost indifferent. This apathy feels like an appropriate response by investors obsessed with the surface of things and inclined to ignore anything that even hints at the darkness lurking below. Many portfolios are built on the assumption of a soft landing for the economy, a stabilization in earnings, and a shift towards more accommodative monetary policies; a scenario investors are unwilling to let go of. Still, you find out about a lot of things the hard way when you’re investing.
Potential triggers for sentiment-driven market moves this week*:
US: Retail sales figures and speeches by Fed officials. Earning reports from Goldman Sachs, Bank of America, J&J, Morgan Stanley, UnitedHealth Group, Blackstone, Taiwan Semiconductor Manufacturing, Netflix, American Express, and P&G.
Europe: UK inflation rate, unemployment rate, and retail sales. ZEW economic sentiment and producer prices for Germany.
APAC: China Q3 GDP growth rate, industrial production, retail sales, house prices, and fixed asset investments. Japan March’s trade balance and inflation rate, and the Reuters Tankan index for April.
Global: Iran, Iran, and Iran.
Note: green background = bullish, red background = bearish
Changes to investor sentiment over the past 180 days for the markets we follow:
How to read these charts: The top charts show the ROOF ratio (investor sentiment) in green (left axis), against the cumulative returns of the underlying market in black (right axis). The horizontal red line at -0.5 (left axis) represents the frontier between a negative sentiment (-0.2 to -0.5) and a bearish one (<-0.5), and the horizontal blue line at +0.5 (left axis) represents the frontier between a positive sentiment (+0.2 to +0.5) and a bullish one (>+0.5). Around the horizontal grey line at 0.0 (left axis), sentiment can be considered neutral (-0.2 to +0.2).
The bottom charts show the levels of both risk tolerance (green line) and risk aversion (red line) in the market. These represent investors’ demand and supply for risk. When risk tolerance (green line) is higher than risk aversion (red line), there are more investors looking to buy risk assets then investors willing to sell them (at the current price), forcing risk-tolerant investors to offer a premium to entice more risk-averse counterparts to take the other side of their trade, which drives markets up. The reverse is true when risk aversion (red line) is higher than risk tolerance (green line). The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio in the top charts, representing the sentiment of the average investor in the market.
The blue shaded zone between levels 3-4 for both indicators represents a reasonable balance between the supply and demand for risk in the market. Conversely, when both lines are outside of this blue zone, the large imbalance in the demand and supply for risk can lead to an overreaction to unexpected news or risk events.
Asia ex-Japan:
Australia:
China:
Developed markets:
Developed markets ex-US:
Emerging markets:
Europe:
Japan:
UK:
US:
*If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.
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