Potential triggers this week: The tug-of-war between negative COVID-19 daily statistics and positive vaccine news will continue to affect sentiment. Monetary policy meetings in the Eurozone, updated GDP figures for Japan, the Eurozone, and the UK. US and China inflation data; US; UK and China foreign trade; Germany industrial output; and Japan current account and machinery orders.
Summary: Global sentiment continues to rise as investors rush the border between Neutral and Bullish like it owes them money. Traditionally, scientific press releases surrounding vaccine research barely make the cut for third-rate bathroom reading, but the worsening statistics on COVID-19 has turned it into a must-read Pulitzer prize winner with the same effect on investors sentiment as a starting pistol on an Olympic sprinter. After three weeks of consecutive surge in sentiment, investor’s mood can best be summarized with a single word: “Yippee”. To be fair, some (Europe and the UK) have gotten the memo late, while others (Japan) are still a little skeptical, but all are following the crowd back up towards the Bullish zone as the rotational race gets underway. Rather than a cognitive bug, perhaps this discrepancy between positive and negative pandemic news is simply the coping mechanism of a risk-tolerant mind for whom neither the past nor the present is prologue.
US investor sentiment heads for the Bullish zone, sans breaks.
Both ROOF ratios continue their assault on the Bullish zone with the same fervor they demonstrated after the Fed’s QE announcement in late March (top chart). Lured by declining volatility and correlation, investors have jumped back into the market picking up beaten-down companies and sectors but without rotating out of the so-called pandemic profiteers as the online economy is not expected to stop outperforming in 2021.
The supply and demand balance for risk has now turned net positive, with risk aversion falling below risk tolerance for the first time since early October (bottom chart). A growing risk appetite will continue to be supportive of higher market levels as investors’ cognitive bias makes them focus on positive news (“the pandemic will soon be over – we hope”), and downplay negative news (“more people are getting infected – and dying – then back in March, and winter is coming”).
Sentiment in Europe races upward to catch-up with its US counterpart.
Investors in Developed Europe reacted later than their US counterparts to the vaccine news, but seem to be making up for lost time now (top chart). Both ROOF variants are now out of the BEARISH zone and into the NEUTRAL one, seemingly headed for the BULLISH zone in the next few days. November saw the European market climb ahead of sentiment (even against it at first), but seemed restrained by the lack of conviction and was unable to break new highs. Perhaps, now that sentiment is supportive, we will see the rally extend to end the year in the black.
Net risk appetite is still negative for now but seems headed for greater demand than supply of risk in the next few days (bottom chart). This lack of risk appetite prevented the market from returning to positive territory YTD but if sentiment continues to improve, the balance for risk could well take the market back to new year-highs before the end of the month.
Sentiment races to the BULLISH zone for both Global and Asia ex-Japan investors.
Investor sentiment for the STOXX Global 1800 continued to climb towards the positive and confident bosom of the BULLISH zone (top chart). The momentum with which sentiment has improved and continues to rise is reminiscent of the post QE and Fiscal stimulus announcements by the various central banks and governments back in March of this year. With this kind of cognitive support, markets could well go on rising despite continued bleak pandemic news in the short-term.
After clocking the best monthly return in decades this past November, the STOXX Asia Ex-Japan 600 index now has investor sentiment momentum behind it to try and make it two (months) in a row (bottom chart). Already in new-high territory since last week, but struggling to break upwards, the improving risk appetite should support the market’s attempt at rising further ahead of year-end barring any major geopolitical (read ‘US-China’) theatrics.