Potential triggers this week: The only real flash point this week is Friday’s US monthly Jobs report which is expected to show record new hires on the back of the $1.9 trillion fiscal stimulus.
Summary: In a move that would be worth Freud’s time to dissect, US markets ended the week at record highs while simultaneously hitting new risk appetite lows. And if you don’t think that retail investors (the kind that say Facebook isn’t important to them but really, really is) have the same rights as institutional investors to push valuations of unprofitable companies to even sub-atmospheric levels, then maybe you’re part of the problem. In contrast, European investors saw an uptick in sentiment, from confidently bearish the previous week to decidedly neutral this week, allowing markets to recover their pre-COVID highs. This even as talks of the beginnings of a third infection wave is heard in several key European markets. The thinking there seems to be that with a third wave of infections will come a third round of monetary and fiscal stimuli, so maybe we hold off on those sell orders, right? Meanwhile global developed and Asia ex-Japan investors have pared their pessimism somewhat although markets there never diverged from sentiment quite as much as in other regions and remain below their February highs.
US markets reached new record highs last week but sentiment remains risk-averse.
Sentiment temporarily halted its decent into extreme bearish territory last week but remains void of any risk appetite with both ROOF ratios remaining below the -0.5 line (top chart). This negative state of mind did not seem to matter much to markets which continued to break new highs via the clever use of popular pandemic profiteer large caps (a.k.a., FAANGs). The only way to square this Freudian slip is to keep in mind that investors are highly concentrated in a few names and that there isn’t really any other non-equity investment options for them at the moment.
Risk aversion (red line) reached a new high last week, climbing higher than even its March 2020 levels, while risk tolerance (green line) dropped to new lows (bottom chart). The supply and demand balance for risk assets is now firmly in favor of supply and were Friday’s job report to spook investors, there would be quite a downside over-reaction given the underlying bearish sentiment.
European markets seem to anticipate a stimulus-induced rebound in sentiment.
European investor sentiment rebounded from the bearish zone back into the neutral one last week in anticipation of further stimulus measures in the face of renewed worries about a potential third wave of new infections and lockdowns (top chart). Both ROOF ratios recovered to end the week in Neutral territory after two months of consecutive decline, allowing markets to edge back up to their pre-COVID highs reached in February 2020.
Risk aversion (red Line) had reached similar highs driven by pandemic and Brexit worries in Q1 and Q4 2020 respectively but came sharply down last week on talks of an expansion of the ECB’s asset purchasing program (bottom chart). Risk tolerance (green line) meanwhile was similarly near its 2020 lows before staging a sharp rebound. The supply and demand curves for risk ended last week perfectly balanced with sentiment sandwiched between pandemic fears and stimulus greed.
Global and Asia ex-Japan investor sentiment recovers slightly to end week in neutral.
In the tug-of-war between global developed markets’ surge towards higher levels and investors’ sentiment’s decent into the bearish zone, a truce seems to have been reached last week with markets ending flat and sentiment recovering into the neutral zone (top chart). Risk aversion is still higher than risk tolerance meaning that the risk remains on the downside given a disappointing US jobs report next Friday.
In Asia ex-Japan, the divergence between our two ROOF ratios has narrowed further with the Sector ROOF (green line) recovering further to reach the neutral zone where the Style ROOF (blue line) had receded to (bottom chart). This slight recovery in investor sentiment helped markets stabilize at current levels, awaiting direction. Risk aversion in this region is only slightly higher than risk tolerance now so an over-reaction isn’t expected but sentiment remains fragile, especially as old geopolitical flareups once again raise their ugly heads.