Potential triggers this week: US, Japan and UK central bank meetings, flash PMI surveys for the US, UK, Eurozone, Japan, and Australia. Later in the week, US and China industrial output and retail sales, and Japan’s tankan survey. In the background, the ongoing COVID-19 ‘good-news-bad-news’ narrative with further details on vaccination deployment versus (still) rising infections and deaths.
Summary: Sentiment makes a beeline for the bullish zone like one races for the liquor cabinet on forced holiday weekends with the in-laws. US investors become ebullient while European and UK investor sentiment remains restrained by the prospect of a no-deal Brexit at the end of the month. In Japan, meanwhile, the mood continues to be positive but without the confidence to cross into the bullish zone. On the COVID-19 front, investors are focusing on the hope the vaccines bring and are continuing to position themselves for an economic return to normal in 2021. Cognitive bias is now strongly positive, leading investors to ignore or ‘forgive’ negative news when it comes in favor of a narrative that confirms their bullish stance. At these levels, the only risk to sentiment would be strongly negative vaccine news (e.g., a high rate of critical allergic reactions) and a recall. Barring that, sentiment seems poised to boost markets higher in the short term.
US investors continue to cheer the vaccine news with a return to the bullish zone.
Both ROOF Ratios are now firmly in the bullish zone with the more ‘emotional’ Style variant (blue line) hitting the roof, literally (top chart). The last time both variants were (still) in the bullish zone was late August. Sentiment has been boosted by both the vaccine news and the prospect of a large fiscal stimulus package. Add to that the fact that the Fed has promised to keep interest rates where they need to be to give investors no real alternatives.
The supply and demand balance for risk is increasingly positive with risk tolerance now well ahead of risk aversion and seemingly headed for a test of the July highs (bottom chart). Given this level of net risk appetite, the Airbnb IPO results are not surprising. In this supply-demand imbalance, the fewer risk-averse investors can extract a large premium for their risk assets from the many more risk-tolerant investors wanting to acquire them, driving valuations to new highs in the process.
Sentiment in Europe continues its slow climb towards the bullish zone, restrained by Brexit.
Sentiment in Developed Europe continued to follow its US counterpart higher, stopping just short of the bullish zone, held back by the continuing prospect of a no-deal Brexit at the end of the month (top chart). The Style ROOF variant (blue line) has recovered faster than the Sector ROOF variant (green line) but both remain in the Neutral zone, signifying that investors there are positive but not yet confident that a vaccine alone, without a trade deal, can return the economy to its pre-COVID-19 normal.
Risk aversion (red line) and risk tolerance (green line) have both retraced their early November moves and are now back at equilibrium (bottom chart). Although at this level the cognitive bias is neutral, the momentum of the last few weeks points to a further rise in sentiment baring definite news of a breakdown in trade negotiations between the UK and the EU.
Sentiment continues to climb for both Global and Asia ex-Japan investors.
Investor sentiment for the STOXX Global 1800 has now broken upwards into the bullish zone for both ROOF variant (top chart). The turnaround in sentiment since the vaccine news on November 9 has triggered an emotional response leading to strongly improving investor sentiment which should continue to support higher market prices in the short term.
Sentiment in Asia ex-Japan has one foot (Style ROOF – blue line) in the bullish zone and another (Sector ROOF – green line) in the neutral zone, but both seem headed higher in the short term (bottom chart). Investors in that region are focusing on positive economic news out of China as a leading indicator for a return to growth in other parts of the world next year. Geopolitics seems to have quieted down, for now, but Asian investors will keep a wary eye on the US-China relationship under the Biden administration as details become known after inauguration day.