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ROOF Highlights — August 10, 2020

Qontigo ROOF™ Score Highlights: Week Beginning August 10, 2020

Potential triggers this week: Covid-19 developments globally and Q2 GDP data for the UK, industrial production for the US, China, Eurozone, UK and, retail sales and inflation numbers for the US and China. And, as we get nearer to November, a Trump card.

Summary: Globally, except in China, investors continue to be bullish for what is now an uncharacteristically long period of time (>70 days on average across markets we follow). There is an old cliché about stock markets; you leave, the market follows. It seems no one wants to be the first to jump off the QE gravy train and incur the wrath of the almighty, whatever, from high on top the thing. Due to a lack of option, the choice was made back in April to become positive and because choices need time, time being the X-axis of investing, investors turned bullish then decided to wait and see, wait and see. Quantitative easing is the only kind of regulatory news that brings together risk-tolerant and risk-averse investors and makes them both become (and remain) bullish for as long as the printing machines run. In our experience, the less fundamentals behind a rally, the harder investors work to chase it, despite the indeterminacy of its source. But, if sentiment continues to rule, more upside can be expected.

US investor’s sentiment remains positive for the 72nd day in a row.

Investors in the US remain positive and have been so for over 72 days now (top chart). Given this cognitive bias, negative news, when it comes, is ignored, or rationalized away by investors who prefer to focus on positive news that confirms their outlook about the post-Covid-19 economic rebound.

Both Style ROOF and Sector ROOF variants remain supportive of higher market levels. Risk-tolerance continues to increase and risk-aversion decrease (bottom chart).  The resulting supply and demand balance for risk is therefore very positive, as it has been since April 27th.  The biggest contributor to this enduring positive bias has been declining levels of volatility.  Over the last 75 days, there has been a pretty stable dispersion across style factors and sectors as investors cling to their choices of winners and losers, making this an uneven recovery so far, but the decline in predicted risk has been a constant driver of higher risk appetite. If neither volatility nor correlation raise their ugly heads, bullish sentiment will continue to support higher market levels.

Sentiment in developed Europe continues to oscillate within the bullish zone for 78 days.

Sentiment in Europe continues to be positive and enters its 78th consecutive day in bullish territory (top chart). This is the longest stretch of all markets we cover during 2020 yet, markets have not benefitted as much as in the US from this positive cognitive bias. Given negative bond yields in that part of the world, it seems odd that equity markets there have not risen more on the back of this positive sentiment.

Risk-tolerance and risk-aversion seem rangebound and moving sideways for the last three months (bottom chart). The gap between them signifies a supply-demand balance for risk in favor of the latter, yet this positive risk appetite has not translated into a bullish market with the Stoxx Europe 600 index trading sideways since June. Here too the capricious nature of the recovery is making it hard for broad-based support across sectors and styles where clear winners and losers are canceling each other out. As in the US, lower volatility is the swing vote driving current risk appetite levels.  Any events that will revert volatility’s decline will result in rising levels of risk-aversion.

Sentiment in global developed markets and Asia ex-Japan continues to be positive.

Sentiment among global developed investors has been positive for 76 consecutive days now, although the Sector ROOF briefly dropped below the bullish line in late June (top chart). Both ROOF variants are firmly in positive territory and remain supportive of higher market levels.  Like elsewhere, the big constant in terms of support for higher risk appetite has been the declining level of predicted risk.

The emergence two weeks ago of a divergence in the direction of our two ROOF variants for Asia ex-Japan, has stabilized somewhat this week with the Style variant halting its decline while the sector ROOF variant continues to point towards even higher sentiment levels (bottom chart). Sentiment in that part of the world has now been bullish for 77 consecutive days, and while it is in good company with other markets having similar length of positive sentiment, rising levels of risk appetite have propelled markets here to new YTD highs, surpassing the previous high of February 19, 2020; a sharp contrast to what anyone can see on the ground!