Investor sentiment remained largely unchanged last week across most markets, with a few exceptions. In the US, assurances of a rate cut at the September FOMC meeting on Friday slightly improved sentiment, shifting it from bearish to negative. In the UK, sentiment saw a modest improvement, moving from negative to neutral. In other regions, sentiment remained bearish, including in Asia ex-Japan, Global Developed, Global Developed ex-US, and Global Emerging Markets. In Japan, investors wavered between being bearish and very negative. European sentiment ended the week as very negative but not quite bearish, while sentiment in Australia stayed positive, and Chinese investors remained neutral.
As we observed at the beginning of August, a negative surprise can quickly push a confident market to the brink of a nervous breakdown. While calm is returning, it’s clear that over the next six to nine months, US interest rates are headed down, while Japan’s are trending upward. Over the weekend at the Jackson Hole Symposium, Fed Chair Powell emphasized his new “less is more” approach to monetary policy, The risk to markets now is if BoJ Governor Ueda walked away from the meeting thinking “if less is more, just think about how much more “more” would be”.
A summer unusually charged with risk events has passed without sparking a bear market. The only notable volatility stemmed from a surprise rate hike in Japan, which briefly caused the abrupt unwinding of a popular trade, shaking global markets for a day. However, both the BoJ and the markets quickly reversed course, with investors opting, for now, to let the horse of observation lead the cart of theory.
This week is light on macroeconomic releases, but sentiment remains overwhelmingly negative across major markets, leaving them prone to overreaction to negative news. The only (known) potential for disappointment are NVIDIA’s earnings and the Eurozone’s inflation data later in the week. Investors may also seize on any softness in Friday’s consumer spending data to bolster expectations for a larger rate cut at the September FOMC meeting. Currently, in the CBOE’s FedWatch tool, the odds stand at 60% for a 25 bps cut and 40% for a more substantial 50 bps cut, up from just 25% a week prior.
How investors react to a miss in consumer spending—whether they see it as a recession warning or as a sign of a more significant Fed rate cut—will largely depend on market sentiment at the time. However, the recent increase in expectations for a larger rate cut suggests that investors are growing more confident that Jerome Powell has swapped his stern "daddy" suit for a more accommodating "come-to-daddy" one.
Potential triggers for sentiment-driven market moves this week
US: Durable goods orders, core PCE price index, personal income & spending data. Earnings from NVIDIA, CrowdStrike, Salesforce, as well as Abercrombie & Fitch, Bath & Body Works, Foot Locker, Gap, and Lululemon which will inform on the health of consumer spending.
Europe: German business and consumer confidence indicators, Eurozone inflation.
APAC: Japanese consumer confidence.
Global: Investors are keeping an eye on the potential for further carry trade unwinding in Japan, and an escalation of the conflict in the Middle East. But both concerns will take a back seat to increasing confidence in a Fed rate cut on September 18.
Note: green background = bullish, red background = bearish
Changes to investor sentiment over the past 180 days for the 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 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.
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