Potential triggers this week: Covid-19 developments and second-quarter earnings season, with companies such as IBM, Microsoft, Tesla, and Twitter reporting their results will continue to dominate the news. Elsewhere, flash PMI surveys for the US, UK, Eurozone, Japan, and Australia, and BoC will be deciding on monetary policy. Other key data to follow include: US existing and new home sales, and the weekly jobless report; UK retail trade, business, and consumer morale; Eurozone consumer confidence; Japan trade balance and inflation; and South Korea Q1 GDP figures.
Summary: Sentiment remains positive in all markets we track except Australia where it remains neutral. Rising levels of risk-tolerance are increasingly at odds with rising levels of new Covid-19 cases around the world; especially in countries where leaders treat history as interpretive and science as metaphorical. In the meantime, CEOs are warning investors that business is not back to normal and may take longer than previously thought to get there. The truth about the real impact of the pandemic on the economy and earnings will remain a well-kept secret that will come out like wisdom teeth, only when the time is right. Until then, Central Banks are making sure the playing field remains in favor of risk-tolerance and hinders any politically ill-advised attempts at risk-aversion.
Strong risk-tolerance continues to support higher market levels.
The temporary divergence between our Style and Sector ROOF Ratios has closed with the latter rejoining the former for an attempt at a new YTD high (top chart). The gap between risk-tolerance and risk-aversion is now as big as it was in early June and mid-May, when hopes for a V-shape recovery were the highest (bottom chart).
Sentimentally speaking, with a cognitive bias this positive it is not strange to see the warning signs from a few CEOs that the economic recovery will not be as soon or as strong as expected, met with denial by investors. It will take formal talks of another round of lockdowns or apocalyptic warnings of biblical proportion from star CEOs for them to be heard.
The continued rise in risk-tolerance is not that surprising given the more-than accommodative monetary policy, but the decline in risk-aversion flies in the face of an increasingly uncertain future. Covid-19 has made economic forecasting a binary exercise and so, listening to V-shape recovery pundits sounds a bit like listening to a gang of children caught with their hands in an enormous cookie jar; they are all going to tell you the same lie.
Sentiment in developed Europe is only a week behind the enthusiasm of its US counterpart.
Investor sentiment in developed Europe is only a week behind the US. The June pause in risk-tolerance as markets awaited the release of economic data on the impact of the first round of lockdowns was followed by a resurgence taking it to new highs for the year as investors focus on the size of a rescue package (top chart). “The damage to the economy from the virus is the worst in decades, we’re hemorrhaging from all sides!! Yes, but think of the meds!”.
As in the US, cognitive bias is now overly positive in Europe and It would take an outright cancelation of a proposed (but not yet agreed) rescue package by EU leaders and talks of another lockdown (local ones are already in effect), for investors to turn bearish. The gap between risk-tolerance and risk-aversion has returned to the highs of early June and mid-May and is much bigger now than back in January.
The STOXX Europe 600 index has some ways to go before recovering its high of early February and if risk appetite remains as it is, an attempt at this peak seems likely. As in the US, though, the low levels of risk-aversion seem misplaced given the strengthening headwinds faced by the economy. So, it is up to EU leaders and their ability not to disappoint on the size and breadth of the rescue package, because that has never happened before…
Risk appetite in global developed and APAC ex-Japan markets remains high but takes a small step back to regroup.
The gap between our two ROOF variants for global developed markets has narrowed this past week, courtesy of a stronger decline in the Style ROOF than the Sector ROOF (top chart). The last time this gap narrowed in similar fashion was in late May and lead to a pause in the market’s rebound from the March crash during June. To be fair, there is no sigh of a repeat of this scenario now as risk-tolerance is still rising and risk-aversion receding even further, but the momentum behind the recent surge in risk appetite has slowed.
We see a similar pattern for the STOXX APAC ex-Japan ROOF Ratios. After building the largest gap between the two ROOF variants for that region in our coverage, the divergence is narrowing fast as the Style ROOF takes a corrective dive. The last time we saw this course correction was in late May which gave way to a flat market for June. To be fair, risk appetite remains strong, perhaps stronger than it has the right to be, and risk-aversion low given the rise in uncertainty.