Potential triggers this week: Covid-19 developments and second-quarter earnings for Alphabet, Apple, Amazon, Facebook, P&G, Pfizer, Gilead Sciences, Exxon Mobil, and Chevron. Also, in the news, the Fed’s monetary policy meeting as well as GDP data for the US, Eurozone, and PMI survey for China. Other key economic data include US personal income and outlays and durable goods orders; Eurozone business survey and inflation; Japan consumer confidence, retail trade and industrial output; and Australia inflation data.
Summary: Investors seem still caught in a past-tense, future-perfect kind of mood having decided that they should not worry about all the facts, only those they can live with. The divergence between market performance and fundamentals is being blamed on some bad calculations: someone forgot to add, someone forgot to minus, someone forgot to carry the one. The second wave of new infections is threatening large swath of the global economy and raising the probability of second lockdowns, but like the mother of a drug dealer, or the neighbor of a serial killer, investors seem to be the last to know, preferring instead to focus on the stimulus packages this will invite. And so quantitative easing triumphs once more over the presumption of economic fragility.
US Sentiment remains high with risk-tolerance firmly in the driver’s seat.
Both of our ROOF variants (Style ROOF – blue line, and Sector ROOF – green line), are in agreement that investors are uncharacteristically positive in the face of rising uncertainty about the economic rebound in the second half of the year (top chart). The consensus seems to be that even if earnings end up not supporting current valuations, liquidity injections from the Fed, or a new stimulus package from congress, will. It appears no-one noticed that even Powell is wearing a mask during public appearances and even POTUS has started wearing one too. Do they know something investors don’t?
The bottom chart shows our ROOF Signal continuing to be positive for the third consecutive week. After a three-week long SELL signal in June, followed by a short NEUTRAL signal as investors awaited new economic data on the impact from the reopening, we are back in a BUY, BUY, BUY mood.
Risk tolerance continues to rise and risk-aversion decline, despite a worsening Covid-19 narrative as investors recreate their own “fuggedaboutit” moment.
Sentiment in developed Europe curbs its enthusiasm but remains very, very, strangely (?), positive.
For the second time this year, investor’s bullish sentiment had dangerously overshot market returns and is now curbing itself, albeit at still very high levels. Both ROOF variants are showing a similar correction as they did in May of this year but remain well within the bullish zone (top chart).
Risk-tolerance (green line in bottom chart) remain range-bound at YTD high levels, while risk-aversion (red line in bottom chart) is flatlined as low as it was pre-Covid-19!? Given the flare-ups in new cases in Spain, France, and elsewhere, triggering travel advisories and new quarantine restrictions, it seems obvious that sentiment will remain driven by the policy responses from the EU and the ECB rather than the current path of the pandemic itself.
The dominance of a risk-tolerant sentiment means that investment decisions will continue to be influenced more by positive news than negative ones, as investors respond to events that confirms their cognitive bias and ignore those that do not. And while it seems like the market rally has run out of steam in early June after the initial rebound in May, it does not look like it has run out of hype.
Risk appetite in global developed and APAC ex-Japan markets remains positive, as well…
Global investors remained positive this past week, with the Style ROOF – always the more eager of the two – increasing its lead over its more conservative Sector ROOF variant. Despite the latter being slightly unsure about why it should feel more positive than the previous week, both remain in bullish territory with risk-tolerance near YTD highs and risk-aversion at pre-Covid-19 lows. Given this positive cognitive bias, expect good news to have more of an impact on markets than bad news.
The convergence between our two ROOF variants in Asia Pac ex-Japan is now complete, but unlike in other markets, the Sector ROOF Ratio (green line in bottom chart) seems more positive relative to its recent history than its Style ROOF counterpart. The Style ROOF ended the week in positive territory but at the lowest point since May. By contrast, the Sector ROOF is near its YTD high reached in mid-June and above its pre-Covid-19 January level as investors continue to buy sectors they see as winners and have stopped selling those they saw as losers pushing up risk-tolerance and flat-lining risk aversion for that variant. Lurking below this positive feeling is of course concentration risk!