by Olivier d'Assier
Potential triggers this week: US GDP, Fed’s monetary policy decision, as well as earnings from Apple, Microsoft, Facebook, and Tesla. Continued focus on the pandemic, further details of President Biden’s legislative agenda, and the IMF’s World Economic Outlook report.
Summary: The absence of clear economic and immunization success stories globally, has turned investors into hypochondriacs, debating who’s feeling bullish and who’s not and who’s not now but was a few weeks ago or isn’t bearish yet but thinks they might be soon, etc.. Starting with the early November news of multiple COVID-19 vaccines, markets in the US and Asia ex-Japan have been building strong antigens to a souring investor sentiment. It seems investors there feel the same way about the incoming Biden administration’s plans to end the pandemic and restore the US’s global standing as Charlie Brown feels when Lucy offers to hold the football – excited, but with a healthy skepticism born out of countless disappointments. For now, sentiment there remains barely on the good side of neutral but could easily degenerate into bearish. Conversely, the bullish sentiment in Europe seems to have removed investors’ troublesome capacity for choice, error, regret, dissatisfaction, and despair from the investment equation, helping drive markets there even higher.
US investors’ cautious optimism descends further, turning into pessimistic skepticism.
Both ROOF Ratios continued to decline deeper into the neutral zone reaching a level at which investors are not pessimistic yet but no longer seem hopeful either (top chart). This is in sharp contrast to rising markets, whose continued positive trend is making investors ongoing criticism sound like those people who despise their job but won’t quit.
The last time risk tolerance fell (green line in bottom chart) and risk aversion rose (red line in bottom chart) was in September-October. Back then, markets resisted the pull to lower levels and traded sideways in a tight range until the vaccine news helped sentiment recover. This time, however, markets seem to imply that investors’ cynicism of whatever is driving valuations higher is nothing but plain old whining. The reality is that they are conflicted by strong earnings from pandemic profiteers on the one hand, and what a deteriorating employment trend means on the other.
Sentiment in Europe continues to rise in parallel with markets in a post-Brexit pain denial.
Investor sentiment continues to rise in Europe, confident in their belief that Brexit is now done and dealt with (top chart) and implementing it will be easy. In November, sentiment did not get the boost it received in other markets from the vaccine news as the post Brexit trade negotiations were ongoing and not headed in the right direction. Back then, markets rose despite rising risk aversion (red line in bottom chart) and declining risk tolerance (green line in bottom chart).
With the trade deal signed, there seems nothing left to hold sentiment back. Risk aversion is now lower than it was after news of the planned May economic reopening, and risk tolerance just as high as then too. In this state of strongly positive cognitive bias, investors are optimistic and confident and will over-react to positive news and under-react to negative one. I would caution that these levels are usually seen at the start of a bull market (e.g., in early May), not three months into one.
Global Sentiment unwilling to bet against markets but sticks to its (bearish) guns in Asia.
As it did in September, after diverging away from markets, global investors’ sentiment halted its decent towards bearish territory in the face of stubbornly resilient (albeit frothy) valuations (top chart). The question now is who gives in first to close this gap, markets or sentiment? To be fair, sentiment is divided with the Style ROOF (blue line in top chart) still in bullish territory while the Sector ROOF (green line in top chart) is in Neutral, giving markets the a higher conviction.
Sentiment for Asia ex-Japan investors remained soft last week, weakening further and only just managing to remain above the bearish line (bottom chart). The divergence with markets continues and with both ROOF variants headed in the same direction, there seems more conviction about being negative than among global investors. The STOXX Asia ex-Japan 600 index, however, has thus far not gotten the memo and continue to achieve almost daily record highs. It seems Asian investors’ mood follows that of US investors lower, while Asian markets are following European ones higher.
