Potential triggers this week: The first of three US Presidential debates between will take place on Tuesday night, hosted by Fox News. Key economic releases include US jobs report, personal income and outlays, factory orders; worldwide manufacturing PMI surveys, Eurozone inflation and business survey; Germany and Australia retail sales; Japan’s Tankan quarterly survey and industrial output.
Summary: Sentiment has now receded to the neutral zone for the US, Global Developed, UK, and Developed European markets according to at least one of our ROOF variants in each case, and for both variants in some (US in particular). Chinese investors have been neutral for several weeks already. We are entering the business end of the US Presidential race with the first of three debates on Tuesday this week. This promises to be an election like no other with the possibility of a delayed result and ultimate legal challenge to declare a final winner. Adding to the uncertainty over this outcome, there will now be a confirmation fight over the President’s nominee for the vacant Supreme Court seat. And still no second stimulus package. Given that we are now looking at another two to three months of uncertainty over these issues, it is very hard to imagine investors regaining confidence without knowing their outcome.
US Sentiment remains directionless for now in the Neutral zone.
Both variants of the US ROOF Ratio remained in the Neutral zone ahead of a politically charged week that will see the start of a Supreme Court confirmation process and the first of three televised Presidential debates. The Tyle ROOF variant managed to end the week just above the neutral zone at 0.51 but was not followed by its Sector peer (top chart).
Risk-tolerance has halted its descent started in mid-August and ended the week higher than it started. Simultaneously, risk-aversion’s rise since about the same time also paused and ended the week below its previous weekly close (bottom chart). At this point, the ROOF Scores indicate that the stakes may be too high for investors to take a confident position on the outcome of the three political events in front of them, namely the passage of a second stimulus bill, confirmation of President Trump’s Supreme Court nominee, and the outcome of both the Presidential and senatorial elections. This week it seems investors chose to focus on the possibility of a stimulus package being passed before the elections but their mood is likely to change week-to-week as these events unfold.
Sentiment in Developed Europe takes its cue from rising new infections in key centers.
Sentiment in Developed Europe nosedived this past week on the back of an increasingly bleak covid-19 narrative pointing to renewed containment measures in key cities across Europe and renewed border closures. Both ROOF Ratio variants seem headed for the neutral zone in the short term if the threat of new social distancing measures is not avoided (top chart).
Risk-tolerance fell more than risk-aversion rose this past week (bottom chart), and although the balance between them remains in favor of demand for risk, the gap has been pretty stable for some time now and has been unable to drive markets higher since mid-July. The lack of progress in sentiment and market moves has mirrored the lack of progress in the post-Brexit trade negotiations between the EU and the UK. Add a worsening Covid-19 narrative and investors may soon run out of patience unless further stimulus measures are announced.
Global investors have reached neutrality which Asia ex-Japan continues to be optimistic.
Risk-tolerance and risk-aversion among global developed investors has reached equilibrium (top chart). In this state, neither a bullish nor a bearish confirmation bias exists, and investors are simply awaiting direction either from the news cycle, geopolitics, or investors in other markets. We are in a new dead zone for now, awaiting earnings results or the denouement of US domestic political events. In either case, this could take at least another month, but the stakes are incredibly high, and it seems investors are incredibly uncertain as to which way this cookie will crumble.
Conversely, investors in Asia continue to chase risk and risk-aversion there is falling faster than risk-tolerance is rising, indicating a type of carefree bullishness not shared by their global peers. The Covid-19 narrative in this part of the world seems under control meanwhile companies here will benefit from stimulus efforts to revive the economies of their main clients in both the US and Europe. Regional markets may also be benefiting from excess liquidity that currently does not have the confidence it needs to take risks in the US or Europe and is temporarily punting in Asia.