by Olivier d'Assier
Potential triggers this week: Q1 earnings from Apple, Facebook, Microsoft, Alphabet and Amazon. Fed monetary policy meeting and US Q1 preliminary GDP data. EU Q1 GDP update, business confidence, and inflation.
Summary: Sentiment remains stuck in neutral in all major markets except China. Investors have gone from convincingly bullish in Q4, 2020 after multiple vaccine news, to fence-sitters and bet-hedgers so far in 2021. Now, you can have the lowest interest rates, better-than expected earnings, the biggest stimulus packages in history, but without confidence, sentiment is just clinging to driftwood and destined to trend aimlessly until some unexpected news puts a stop to this arteriosclerotic feeling. Markets have gotten well ahead of sentiment in 2021, and, as we have often observed, the bigger this divergence between the two, the more dependent on improving sentiment markets become for further upside. The tenor of the COVID-19 narrative may have improved in developed markets, but it has become malignant in emerging ones. Investors’ brain is telling them that valuations are high given the lingering uncertainty, and that the pandemic’s troubles aren’t all behind us yet. Their gut seems to be telling them to listen to their brain.
US investor sentiment continues to question the latest market moves to higher levels.
Both ROOF ratios for the US have stalled just inside the Neutral zone in a sign that more direction is needed for them to gain confidence in this rally (top chart). This week’s scheduled earnings announcement should confirm whether investors still give a FAANG about pandemic profiteers, or if they have moved on and require a broader economic recovery to push valuations higher. Investor sentiment has been in the neutral zone for 57 of the 77 trading days so far in 2021. By contrast, in the 128 days of Q3 & 4, 2020, they only spent 46 days in neutral.
Risk tolerance (green line) and risk aversion (red line) are nearly evenly matched meaning that the supply and demand for risk is at equilibrium (bottom chart). In this situation, neither side can extract a large premium or discount for risk asset form their counterpart, normally leading to a range-bound market until something tips the balance on either side.
European investor sentiment dips a toe in the Bullish zone, then stops.
European investors have felt more positive about their prospects since early March when both ROOF ratios bottomed-out and started their climb towards the bullish zone (top chart). The Sector ROOF ratio (green line) got there first but seems unwilling to go it alone and has remained flat just inside the bullish zone. The Style ROOF ratio remains in the Neutral zone, reticent to cross into the bullish one. Unlike the moves in December and April 2020, this one clearly lacks confidence.
The Sector risk tolerance (green line) has been on a strong upward trend since early March and seems ready to climb higher still, but the downward move in Sector risk aversion (red line) has flattened-out this past week and may start to reign in the rising demand for risk (bottom chart). We also note that the decline in risk aversion halted before its previous lows in February and that risk tolerance is likewise below its February highs, and the market has already risen some 8% since then.
Global investors’ sentiment recovery runs out of steam and Asian investors seem conflicted.
Global investors seem to question the latest rise in markets, as they did back in January, with both ROOF Ratios dipping slightly from their recent highs (top chart). Markets, meanwhile, have notched almost 4% of gains in April alone and are increasingly pulling away from sentiment. The growing gap between markets and sentiment reflects the lack of confidence investors have in the breadth and depth of the global economic recovery.
Asia ex-Japan continues to paint a mixed picture and the two ROOF ratios (Sector ROOF and Style ROOF) have been more often at odds than in sync (bottom chart) in 2021. Year-to-date the correlation between the two is -0.44 compared to a long-term average of +0.63. This and the divergence between market returns and sentiment again highlights the lack of confidence among investors in this region. Much still depends on the COVID-19 narrative and its impact on global trade.
