ROOF Highlights — April 19, 2022

Qontigo ROOF™ Score Highlights: Week of April 18, 2022

Potential triggers for sentiment this week1 :

  • US: Earnings season continues: Bank of America, J&J, IBM, Netflix, Procter & Gamble, Tesla, United Airlines, AT&T and American Express due to report in that order. Traders will also keep a close eye on speeches from several Fed officials, including Fed Chair Powell.
  • Europe: UK retail sales are seen falling for the second straight month in March and flash Markit PMI figures for April will probably show a slowdown in both manufacturing and services activity. Elsewhere in Europe, flash Markit PMI figures for the Eurozone, Germany and France are expected.
  • APAC: Scheduled data includes Chinese first-quarter GDP figures, March industrial production, and retail sales. BoC rate decision.
  • Globally: The ongoing conflict in Ukraine and the response from the West will continue to dictate investor sentiment, as well as food prices globally.

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

Summary of changes in investor sentiment from the previous week:

  • Investor sentiment continued to rise in all markets we track, with only developed Europe and global developed markets ending the week still bearish but well off their April lows. Sentiment in the US, Asia ex-Japan, Japan, and global emerging markets ended the week neutral. Sentiment in China ended the week bullish on the back of ongoing monetary policy support, despite the threat of further lockdowns as daily new cases of COVID-19 surge in major cities across the country.
  • Globally, the recent rise in sentiment indicates that investors have reached a consensus that the world will not let Putin win the war in Ukraine. The probability of a Russian defeat, with a possible regime change and a little Perestroika and Glasnost thrown in, is now their base-case scenario.
  • Their worst-case scenario involves a desperate reaction from Putin once he, too, reaches that conclusion. Instead of peace, reconciliation, and reconstruction, we are only hearing old Cold War threats from Russia’s leadership, involving the potential use of nuclear weapons. The past is fighting the future in Ukraine, and time is fast running out for the world to see to it that the future wins.
  • Their best-case scenario remains infeasible in these times of paranoid politics. The bringing together of Russia’s natural resources, US technological prowess and China’s manufacturing would deliver the greatest benefits to the largest number of people, not to mention the planet.
  • And so, investors keep calm and carry on. Their base case scenario is not the unfathomable worst, nor is it the infeasible best, just the status quo they can live with. That seems enough for sentiment to return to neutral, for the time being.

US investor sentiment

US investor sentiment (green line) remained flat last week ahead of a long weekend, halting its positive momentum of the past few weeks. Since March, investors have reacted to the concerted efforts by both major central banks and NATO governments to resolutely tackle the twin negative forces of inflation and the war in Ukraine.

At this level, investors seem ready to give authorities the benefit of the doubt, but the level of risk aversion is still above the level of risk tolerance, indicating an ongoing worry about the downside in the event that they may yet fail.

European investor sentiment

European investors’ sentiment (green line) rose sharply last week, ending bearish but just shy of neutral. The recovery in sentiment in Europe is about a month behind that of the US, but given Europe’s higher dependency on Russian commodities, this lag is understandable. The longer this war goes on, the more damage to the European economy, and sentiment may only recover a neutral level once the end is in sight, and may not return to a bullish mood until the economic threat has been averted.

The improvement in the supply and demand for risk assets has been led by a rise in the level of risk tolerance (green line). Risk aversion (red line) has only recently started to decline but remains well above even its March lows.

Global developed markets investors sentiment

Sentiment among global developed-markets investors (green line) rose sharply last week on the back of improving sentiment in the US and developed Europe, ending bearish but well on its recovery path towards neutral. Sentiment among global investors was also late to recover due to ongoing elevated currency and country risk.

Risk tolerance (green line) was mostly flat last week while risk aversion (red line) declined sharply, indicating that most of the improvement in the risk appetite of investors is due to fewer worries about downside risk rather than an expectation of higher upside.

Asia ex-Japan markets investor sentiment

Sentiment among Asia ex-Japan investors (green line) continued its recent rise to end the week neutral and at the highest level since late November. The recovery in sentiment, if sustained, could help markets stage a recovery to their year-to-date highs reached in January.

Risk tolerance (green line) rose to its highest level since early December, while risk aversion (red line) fell to new year-to-date lows. The demand for risk assets is now at equilibrium for the first time since late November.

Global emerging markets investor sentiment

Sentiment among global emerging-markets investors (green line) saw the strongest recovery of all the markets we track, ending the week just shy of bullish. Sentiment is now as high as it was last November, when markets were some 10-15% higher. Continued positive sentiment momentum should translate into a more sustainable rally in the short term.

The gap between risk aversion (red line) and risk tolerance (green line) reversed last week with risk aversion ending below risk tolerance levels for the first time since December. As the balance of supply and demand for risk assets switches in favor of demand, a positive risk appetite should translate into higher market prices in the near term.

Japan market investor sentiment

Sentiment among Japanese investors (green line) continued to recover last week, ending neutral, after having been bearish since late January. The recovery took only two consecutive weeks and may have caught many investors by surprise. At this level, investors should not be overreacting to negative news and look for reasons to become positive.

Risk aversion (red line) has been declining sharply these past two weeks, erasing most of the increase in fear that started in January of this year. Risk tolerance (green line), has been rising and is now just below the level reached at the start of the year, bringing the supply and demand for risk assets in Japan to equilibrium. 

China (domestic) investor sentiment

Sentiment (green line) among Chinese (A-shares) investors ended last week bullish for the first time since November. The recovery continues to be led by supportive monetary-policy moves, which aim to insulate the economy and financial markets from the damage of prolonged lockdowns in major cities across the country. The last time sentiment was this positive, markets were some 10% higher than current levels. If nothing stops the recovery in sentiment, markets could stage a rally in the short term towards January levels.

Risk tolerance (green line) has risen past levels of risk aversion (red line), confirming a positive risk appetite among Chinese investors for the first time this year. As the potential demand for risk assets continues to outpace the potential supply, investors will begin to chase the price of risk assets higher.