Potential triggers this week: Key economic data include US retail sales and industrial production; UK and Eurozone consumer confidence and inflation; Japan Q3 GDP, trade balance. Investors will also turn their attention to the G20 Virtual Leaders’ Summit as Q3 earnings season ends.
Summary: Increased uncertainty from rising new infection cases globally, the threat of further lockdown measures, the lack of an official victory in the US elections, and other Trumpisms, unnerved investors last week with Sentiment declining further in all markets we track. Global Developed and Emerging markets, Developed Europe, Asia ex-Japan, and the US are now all in bearish territory. Australia, China, the UK, and Japan remain in the Neutral zone but seem headed lower as the number of new infections rises there too. Markets have ignored the deteriorating sentiment, focusing instead on positive news regarding a potential Covid-19 vaccine, and are now dangerously out of synch with risk appetite. A negative cognitive bias leaves markets vulnerable to an over-reaction to negative news. The lack of company-specific news now that the Q3 earnings season has ended means geopolitics and macro news will dominate the front pages; these have been the main source of uncertainty in the last few weeks, and the G20 is about to start.
US investor sentiment remains negative despite markets’ upward moves.
Aggregate investor sentiment retained its negative cognitive bias last week with both ROOF ratios unable to rise despite market’s favorable response to news regarding the Covid-19 vaccine (top chart). Investors are rotating into sectors hurt by the pandemic without exiting those that were helped by it, signaling that fresh inflows following the US election may be behind the market’s upward move. This divergence between markets and sentiment leaves the former vulnerable to a strong over-reaction from investors in the event of worst-than-expected news. This trigger is unlikely to come from company specific news as the Q3 earnings season ends, but more likely to come from macro news regarding the Covid-19 policy responses or further uncertainty regarding the peaceful transition between the Trump and Biden presidency.
Risk aversion levels remain much higher than risk tolerant ones (bottom chart) leading to the need to give large price discounts to exit positions as the more numerous risk-averse investors seek to sell their risk assets to the less numerous risk-tolerant ones. Where have we seen this playout before …
Sentiment in Europe worsens with the news of increased infection and lockdowns.
Sentiment in Developed Europe resumed its downtrend last week after a short break the previous week (top chart). The deterioration in sentiment comes amid a resurgence of new infections and associated social-distancing policy responses across the continent. Market chose to focus on the vaccine rather than the new infections but are now dangerously out of synch with investor sentiment which peaked in the beginning of September.
The deterioration in the supply and demand balance for risk that started in late September saw a temporary truce in the previous four weeks but last week, risk aversion began to rise again and risk tolerance decline (bottom chart) leading to a growing imbalance between the potential supply and demand for risk assets. If a worse-than-expected news triggers this growing negative cognitive bias into (selling) action, the recent unsupported (by sentiment) market rise could quickly unravel.
Sentiment returns to its previous downtrend for both Global and Asia ex-Japan investors.
Global investors’ sentiment followed other major markets downward last week with both ROOF variants now into Bearish territory (top chart). The STOXX Global 1800 is now dangerously out of synch with risk appetite. Risk aversion is back to its April highs and risk tolerance is just above its YTD low also reached in April. Given this imbalance between the demand and supply for risk, any negative news on the global stage could trigger an over-reaction to the downside.
Sentiment in Asia ex-Japan also followed its peers downwards with both ROOF variants ending the week in bearish territory (bottom chart). Here too the STOXX Asia ex-Japan 600 has ignored a deteriorating sentiment and surged upwards on news of a Covid-19 vaccine. Risk aversion levels have returned to their April highs, meanwhile, risk tolerance levels reached a new YTD low signaling that risk appetite is quite negative right now in this part of the world.