The nature of markets is change, and the nature of investors caught in a bubble is denial. Last week, Jamie Dimon’s cockroaches got a plus‑one: Goldman Sachs’ David Solomon joined him in pushing back against the notion that ‘this time is different’ in credit, reminding investors that private credit didn’t escape the cycle — it just locked the exits. Recent tremors are a warning shot, not an anomaly. Redemption pressure, underwriting doubts, and JPMorgan’s tighter lending all signal that risk is re‑pricing — exactly what happens when a cycle turns after years of private credit firms quietly mainlining software loans during the easy‑money era.
Sentiment isn’t static; it moves through like a storm system, and when it gains enough force, it drives markets into overshoot — bullish or bearish. Investors have been bearish for five straight weeks, leaning into defensive trades and pricing in the worst‑case scenario for this war. With expectations now set extremely low, reality doesn’t need to be good — it just needs to be less bad than feared for sentiment to lift from here. That raises the real question: have we already absorbed the worst of this conflict (oil at $110–120), or is an even bigger shock still ahead (oil at $150–200, looking at you Kharg Island)? If it’s the former, sentiment should start to recover, pulling risk tolerance and markets up with it. If it’s the latter, then a second cold front remains unpriced — and investors may prefer to namast’ay in bed.
Identifying where we are in this Iranian storm system — in the eye or already past it — has been made harder by the Trump administration’s conflicting signals on the trajectory of the war. It claims the US has “won’ (whatever that means) and “met its goals” (whatever those were) “weeks ahead of schedule” (whenever that was). At the same time, it threatens to “hit and obliterate” Iran’s power plants if the Strait of Hormuz isn’t reopened within 48 hours. It also says Iran wants to negotiate, but Washington does not, leaving any potential back‑channel offramp effectively closed from the US side.
Investing is forecasting. Investors are always focused on an immediate future permanently dangled in front of them, but when the present falls apart, as it did with the closure of the Straits of Hormuz, so does the future they had associated with it. And having the future taken away from them is the mother of all plot twists.
The mood stayed broadly risk‑off across markets last week, with sentiment in 8 of the 9 markets we track finishing firmly bearish. A brief mid‑week flicker of hope — mostly in EM and parts of Asia — didn’t hold. By Friday, risk aversion was back in charge. China saw the sharpest deterioration in sentiment, while the mood in Developed Markets ex‑US and Australia also weakened into the close. Global Emerging Markets improved and Europe grew less bearish, but neither came close to a regime change (pun intended). Overall, sentiment ended the week decisively bearish, keeping reactions skewed to the downside if and when reality turns out worse than already low expectations.
Potential triggers for sentiment-driven market moves this week[1]
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US: PMI and consumer confidence data, and surveys by multiple regional Fed banks.
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Europe: Eurozone and UK PMI data. Germany’s consumer confidence data. UK CPI.
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APAC: China’s February industrial profits. Japan’s inflation and PMI data, and minutes from BoJ meeting.
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Global: The Persian Gulf Catch‑22: exit risks Hormuz; escalation risks supply.
[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.
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:
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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).
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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).
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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:
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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.
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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.
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