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ROOF Highlights — January 15, 2024

Axioma ROOF™ Score Highlights: Week of January 15, 2024

Axioma ROOF Score Highlights will be taking a week off and returning on Monday January 29, 2024. For these insights and more, follow us at our new home

Potential triggers for sentiment-driven market moves this week1:

  • US: Retail sales, consumer confidence, and existing home sales data. Earnings report from Morgan Stanley, Goldman Sachs, US Bancorp, Charles Schwab, and PNC.
  • Europe: UK inflation, retail sales, and unemployment data. Speech by ECB president Christine Lagarde, and Germany’s full year 2023 GDP data.
  • APAC: China Q4 GDP data, along with retail sales, industrial production, unemployment, and investment data for December. Japan inflation data for December.
  • Global: It is earnings reporting season again and company-specific news will be in the driver’s seat for investor sentiment, while geopolitics takes a back seat this week.

Insights from last week’s changes in investor sentiment:

Investor sentiment softened slightly last week but remains mostly positive. Sentiment was bullish in five of the ten markets we follow (Asia ex-Japan, Global Developed Markets ex-US, Global Emerging Markets, the UK, and (briefly?), with the continued hope for a global (ex-Japan) pivot to a more dovish monetary policy, by major central banks. In contrast, sentiment among Chinese investors retreated from last week’s bullish feeling, returning to just positive this week, after further signs of deflation were met by a lack of stimulus response from the authorities, like an iPhone that’s (temporarily?) lost communication with its cloud. As signs of a slowdown in the world’s second largest economy continue to mount, a sense of urgency is growing among Chinese investors, that without further stimulus, the economy is likely to slow down further in 2024. 

US investors, meanwhile, remained unwilling to commit either way ahead of the long weekend, with sentiment firmly anchored in neutral, ahead of the Q4 earnings season.  UK investors however, remain bullish, fully expecting the BoE to start rolling back its 2023 rate hikes, in 2024. European investors, whose ancestors were once heard saying “What a cute wooden horse. Of course I’ll sign for it”, have gone from the most bullish out of ten markets at the start of the year, to barely positive now. This, on the back of a hope that a recession forecast would prompt the ECB to start cutting interest rates sooner rather than later,

Globally, investors are displaying classic symptoms associated with Stockholm Syndrome. Having endured three consecutive years of being held hostage by central banks—initially through inaction, amidst rising inflation in 2021 and subsequently through overreaction in 2022-2023—interest rate cuts have emerged as their newfound obsession for 2024. In their mind, the silver lining amid the excessively high interest rates lies in providing central banks with the chance to aggressively lower them on their behalf. It is as though, after years of being held captive by a hawkish monetary policy, investors have developed a fondness for the very institution that took their financial freedom.

As far as central banks are concerned, their strategy for 2024 continues to hinge on the theory of Mutually Assured Decline (MAD), wherein both interest rates and inflation are anticipated to decrease in tandem. However, should a geopolitical upheaval or an extreme weather event propel energy costs higher, leading to a resurgence in inflation, the shift towards détente, via a more dovish monetary policy will be promptly canceled.

The US financial sector will be the focus this (holiday-shortened) week as 70% of the earnings (S&P500 constituents) reports in the next five days will be from companies in that sector. JP Morgan and Citigroup reported last week and set the mood with better-than expected earnings. It will be up to the rest of the sector to convince US investors they can become more positive for the rest of the reporting season.

Elsewhere, in Europe, investors will focus on UK inflation data and the minutes of the last ECB rate setting meeting for clues as to the timing of the much anticipated first rate cut. Sentiment among Chinese investors will be tested further this week with the release of a batch of Q4 economic data and any geopolitical repercussions from the (pro-independence) results of the Taiwan Presidential election this past weekend.

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.

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Asia ex-Japan:

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Developed markets:

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Developed markets ex-US:

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Emerging markets:

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

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