by Olivier d'Assier
Potential Triggers: US CPI, industrial production, and consumer confidence data for April. UK Q1 GDP and industrial production data. ECB policy meeting notes, and EU industrial production.
Summary: The Fed giveth and the Fed taketh away. Last week, in a tone usually reserved for announcements of the second coming (and having a similar impact on investor sentiment), Treasury Secretary Yellen forecasted higher interest rates. She then said she didn’t mean to say what she totally just told investors. Unfortunately, there are no takebacks on Wall Street. Worries about inflation and higher interest rates pressured investor sentiment globally, halting and even reversing its recent rise in most markets. US investor sentiment declined, ending the week with one foot in bearish territory, with European and Japanese investors not far behind them albeit still in the Neutral zone. Asia ex-Japan and Chinese investors remain the most optimistic of the markets we follow. Valuations are Tech-Bubble high, and investors will get their first read of Q2 inflation data this week and will balance that against an unexpectedly weak jobs report last Friday. The Fed says it is focused on unemployment, but investors seem focused on inflation instead and April CPI data due Wednesday could well be a potent trigger for investors with a growing negative confirmation bias.
US investor put one foot into bearish territory on inflation worries.
Official comments about inflation, higher interest rates, and frothy valuations weighed on sentiment this past week with the Sector ROOF ratio (green line) dipping back into the bearish zone (top chart). Markets, likewise, have been hesitant to clear higher levels without the benefit of investor confidence behind them. Investors are torn between an inflation narrative that calls for higher interest rates and an employment one that calls for continued stimulus.
The supply of risk (red line) is now slightly higher than demand (green line) but the imbalance between the two does not yet suggest an overly negative confirmation bias, just a hesitant one (bottom chart). In this state, investors lack the confidence to go after good news and are becoming rather skeptical of it but are not yet pessimistic about the future. Their lack of confidence means they do not know which news to trust and are likely to remain uncommitted either way for now.
European investors sentiment pauses at the border between neutral and bullish.
Both ROOF Ratios have halted their climb to the bullish zone with the Style ROOF (blue line) dipping back into the Neutral zone (top chart). After two months of parallel runs between rising markets and sentiment, the two diverged last week with markets continuing their recent upward momentum while sentiment paused and seems poised to return to the neutral zone.
Risk aversion (red line) bounced off its recent lows and started to rise again, while risk tolerance (green line) is consolidating at current levels (bottom chart). This hesitation may be a repeat of the pattern observed in late January. Back then, after a brief hesitation, markets forged ahead on continued hope for a global economic recovery. This time, however, it may take concrete data confirming the vaccination efforts are paying off and the path to a recovery is clear of further lockdown measures for investor sentiment to overcome its lack of confidence.
Global investors’ sentiment remains on uptrend as Asian investors pause for confidence.
Global investors’ sentiment paired some of its enthusiasm last week but remains on an uptrend (top chart). A weakening sentiment in the US affected the Style ROOF’s (blue line) attempt at the bullish zone with both ratios consolidating at equilibrium in the middle of the neutral zone at week’s end. Despite this recent pullback, markets continued to rise as if investor confidence was behind it.
Investor sentiment in Asia ex-Japan also consolidated last week but remains in the bullish zone (top chart). Sentiment in Asia has been higher than in other regions since mid-April, yet markets have not performed as well. There is no ‘(US) inflation vs. (US) unemployment’ dilemma here, only US inflation, higher US interest rates, and a stronger USD matter. It seems that for now, Asian investors have preferred to believe the Fed and its assurance of continued low interest rates over those who forecast inflationary pressures leading to higher interest rates.
