Potential triggers this week: The coronavirus will continue to dominate the headlines as investors fear that a second wave of infections could delay the easing of restrictions in several countries. Top negotiators from the EU and the UK will be meeting to discuss Brexit, and European finance ministers will debate the bloc’s budget. On the economic data front, US ISM Non-Manufacturing PMI, Germany factory output and orders, China inflation data, Japan machinery orders.
Summary: As the world battles a second wave of infections, even bigger than the first, investor sentiment remains resiliently positive, helping markets rise for another week. ‘Sbit weird, innit? To be fair, sentiment is well off its highs of early May but has ricocheted against the neutral zone last week (for apparently no good reason) indicating that while investors have not yet become disgruntled by the coronavirus news, they are still some ways from being gruntled. Central Banks’ QE analgesic has worked its potent magic, helping investors ignore rising feelings of risk-aversion stirred by record cases of new infections. So, while we seem in remission for the time being, rising bearish sentiment has only been stored away, like genes for baldness, and are only talks of a lockdown away from revisiting markets.
After three weeks stuck near neutral, US investors are showing signs of renewed risk tolerance.
After settling just above the neutral zone since mid-June (top chart), the style variant of our ROOF ratio (blue line), always the more optimistic of the two, has started to rise again. Investors’ shift towards risk-tolerant styles and away from risk-averse ones in the style variant of our ROOF Ratio (bottom chart) has helped overall risk-tolerance (green line) rebound, and risk-aversion (red line) decline.
We note that both risk-tolerance and risk-aversion remained flat in the sector variant (not shown here), resulting in a flat ROOF Ratio (green line in top chart), and indicating that the lift in sentiment hasn’t yet affected sector allocation decisions. Markets last week have chosen to follow the style variant’s lead and edge higher, despite alarming new infection rates in key states, a growing dispersion of opinions on how to tackle them, and a bizarre leadership vacuum. Thirty-six states now have a worse second wave than the first and are starting to curtail some of their reopening measures. Are investors just betting on another round of stimulus measures from the Fed?
Sentiment in developed Europe remains flat, just above the neutral zone, waiting for directions.
European investor sentiment is stuck in a wait-and-see mode, just above the neutral zone as economic data starts to show a slow return to normal. Investors in that part of the world had banked on a U-shape recovery instead of the V-shape scenario adopted by their US counterparts and seem perfectly happy to observe rather than guess where the economy is heading next.
Both market and sentiment momentum have seemingly stalled (bottom chart) leaving investors unsure of what comes next, but half fearful of it still. It is back-to-the-pub for some, and back to the Brexit negotiations table for others, as the UK and the EU try to narrow their differences on the future of their trade relations. There seems little to give investor sentiment direction until the start of the Q2 earnings season later this month.
Risk appetite seems split between our two variants, nowhere more so than Asia ex-Japan.
Both global developed and Asia ex-Japan ROOF Ratios are showing a growing divergence between our two variants (style in blue, sector in green) with the style variants becoming more bullish recently. Nowhere is this divergence of opinion as marked as in Asia ex-Japan (bottom chart). Global developed market sentiment will likely take its cues from US and European investors in the coming weeks, but Asia ex-Japan seems to be driven more by regional issues rather than global ones.
For Asia ex-Japan, although the sector ROOF ratio (green line in bottom chart) seems to be declining, this mask a rise in risk-tolerance for the last two weeks. Risk-aversion had been rising as well for the past three weeks, which helps explain the slightly downward sloping Sector ROOF ratio (green line in bottom chart). As in other markets, the Style variant is more optimistic than its more economically sensitive sector variant. The upcoming Q2 earnings season and forward guidance from CEOs will help the Sector variant make up its mind.