To The Moon

Insights from last week's changes in investor sentiment:

Last week, investor sentiment turned bearish across all markets we follow except China. Only Australian investors showed a slight recovery but still ended the week in negative territory. Meanwhile, sentiment among Chinese investors, which had been bullish since mid-December and fueled a 15% year-to-date rise in the market, has now declined to just positive as they continue to await details on the next wave of stimulus from authorities. Globally, Trump continues to be the elephant in every investment room that investors need to tiptoe around as they rush to steer their portfolios to safety ahead of next week’s tariffs announcement.

Tariffs are coming. They might not make America great again, but Trump predicted them, named them, claimed them, and continues to project the illusion of being up to his elbow in control. US Investors, however, are increasingly skeptical. Since mid-December, they've been rebalancing their portfolios away from the pro-growth impact they initially expected from his presidency, shifting towards more risk-averse market segments in increasing numbers, just in case he misjudged the situation and all he gets is an arrogant result, where his tariffs unite the world against the US and not with it.

Global investors have turned skepticism into action, reducing their overweight positions in the US market in favor of Europe and Asia. This shift was driven partly by relative value opportunities and partly by growing unease over the numerous domestic and international conflicts the Trump administration has simultaneously taken on in a Napoleonic manner—immigration, education, Canada, Mexico, Greenland, Ukraine, Gaza, China, and Iran, to name a few.  The issue for investors isn’t the number of simultaneous fights – some clearly need fighting – but the random nature of these conflicts, which suggests there are no sacred cows.

The US and Canada’s supply chains are intimately intertwined, making several round trips across the border before reaching consumers. As for the US and Europe, “no two regions in the world are as integrated as the US and Europe, conducting some $9.5 trillion in bilateral trade each year”. Any disruption, even a “transitory” one, to this delicate balance will have consequences, especially for economic growth and monetary policy – two areas where investors have placed substantial directional bets. Given the lack of clarity for both of these, successfully avoiding large drawdowns might rely more on luck than skill. The stakes couldn’t be higher now that risk-averse investors are trumping (pun) risk-tolerant ones  two-to-one (see bottom chart for each market below), setting the stage for an emotional overreaction to negative news in the short-term. However, for those willing to speculate, high risk means high return, and fortune never gives you more than you can handle, so if she gives you a lot, take it as a compliment.

The worldwide decline in sentiment underscores the growing unease amid the uncertainty surrounding global trade, tariffs’ impact on the economy, inflation, and the future direction of interest rates. Investors are bracing for next week's 'reciprocal' tariffs announcements - Against which country? How high? How long? On what products? For markets, mum is the word for only so long and then it has to go back to being British parent.

Note: green background = bullish, red background = bearish

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

• US: Speeches by Fed officials, and personal income and spending and PCE price data.

• Europe: Eurozone PMI data. Germany’s unemployment and business confidence data.

• APAC: Tokyo CPI data in Japan. Earnings from China’s largest banks.

• Global: Ongoing peace efforts in both Ukraine and Gaza. Details on President Trump’s upcoming reciprocal tariffs due next week.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

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.