To The Moon

Investor sentiment ended the week bullish in Australia, Japan, and the UK, driven by rising gold prices, a weakening Yen, and decreasing inflation, respectively. In contrast, sentiment in China has turned negative following disappointing macroeconomic data last week. In the US, stronger-than-expected earnings have temporarily halted the decline in investor sentiment, preventing it from becoming bearish, but it remains in negative territory at the week’s end. Elsewhere, Asia ex-Japan, Global Developed and Emerging Markets, and Europe, sentiment remained neutral, possibly in a holding pattern for the rest of the year.

This month, the Chinese authorities have shifted from trying to support the stock market ‘passive-aggressively’ to outright ‘aggressive-aggressively’. Unfortunately, their substantial stimulus package seems misdirected. China’s economic issue isn’t a lack of supply but an oversupply problem, exacerbated by weak domestic (and foreign) demand and a significant consumer confidence crisis – akin to the feeling of living in a lie without knowing what the truth is. As for the authorities, denial has become so pervasive that they don’t seem to realize they are in only the third year of a lost decade, the way a fish doesn’t know it lives in water, until it’s taken out of it.

Simply attempting to stabilize property prices is like plugging  a leak in a dam with your finger when the entire dam needs rebuilding. The economic model needs changing, the stimulus needs redirecting, and the political goals need refocusing – away from desperately trying to gain influence overseas to trying to build affluence at home (i.e., Make China Great Again, not, Make China Bigger Still).

European investors were unmoved by the ECB’s third, widely expected interest rate cut. Unlike in the US, the earnings reports from European luxury brands and automakers have dampened sentiment by underscoring the negative effects of a slowing Chinese economy on their business prospect. Further complicating matters for investors is China’s retaliatory tariffs targeting European pork producers. Can Europe afford a trade war with China? And if not, what is the alternative?

Investors become bullish for different reasons: economic growth, corporate earnings, monetary and fiscal policies, technological innovations, new vaccines, or even the latest iPhone. But, they turn bearish for the same reason: uncertainty. And there is plenty of that around the corner. With the US elections just two weeks away, voters remain deeply divided, unable to agree on as much as the color of the sky. The outcome of the election will have significant implications for the wars in Ukraine and Gaza, the future of NATO, US-China relations, global trade, and reproductive rights in America. For investors worldwide, the outcome will determine whether the near future will be predictable or unpredictable.

Potential triggers for sentiment-driven market moves this week[1]

• US: PMI, durable goods orders, and housing start data. Earnings from Tesla, Coca Cola, 3M, General Motors and Verizon.

• Europe: Germany's IFo business climate index and consumer confidence figures for the Euro Area. PMI data for France, Germany, and the UK.

• APAC: Japan PMI data. In China, FDI data and loan prime rates decision by the BoC.

• Global: The shape and size of Israel’s retaliation on Iran for their missile attack earlier this month. An ‘October surprise’ in the US?

[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 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.