Investor sentiment continued to decline in every market we follow, with investors in Asia ex-Japan, Global Developed ex-US and Global Emerging markets, now on the verge of turning bearish, joining Global Developed Markets investors who were already there. Investors in Europe and US are now strongly negative, but not yet bearish, with the only remaining positive investors being found in China and Japan, although less so than in the previous weeks.
For those who thought the US voting with Russia and China against its allies at the UN was surreal, last week got a lot surrealer (I know Windows – not an actual word). And just like that, chaos returns to the White House, if it ever left. Very comforting. The one fixed point in an otherwise uncertain world. I must confess, the math needed to explain chaos theory is way over my head, so I won’t even attempt it. Instead, here are the Cliff Notes on the main issues causing the ‘Whiskey Tango Foxtrot’ moments occurring in investment committees everywhere.
US - Mexico & Canada: The month of reprieve for Mexico and Canada is up and before they knew it, it’s tariff time again. Or illegal immigration time. Or fentanyl time. Or that other blah. Call them what you want, the smell is the same. The week ended with a partial win for Trump as Mexico agreed to match his tariffs on Chinese goods. Treasury Secretary Bessent hinted heavily that Canada should too.
US - Venezuela: Trump: “Take your immigrants back.” Maduro: “Why?” Trump: “They're here illegally”. Maduro: “Well, possession is nine tenth of the law, so, you keep them”. Call ended.
DODGE: This week saw Episode II of the “Washington Chainsaw Massacre” reality show. In this sequel called “The Employees Strike Back”, the courts are getting involved and judges are receiving a crash course in career risk management. TBC.
US - China: Trump announced an additional 10% tariff on Chinese goods, bringing the total to 20%. Additionally, new port fees of up to $1 million per call will be imposed on ships operated by Chinese companies or vessels built in China but operated by non-Chinese companies, effective March 24. With this move, the US is upping the ante on China’s previous retaliation of 15% targeted tariffs. The ball is now back in China’s court. What’s your move, Xi? Call, raise, or fold?
US - Ukraine: It’s the classic tale. Boy meets Ukrainian girl. Boy falls for Ukrainian girl. Then boy meets particularly troubled Russian girl. Boy falls out of love with Ukrainian girl and in love with Russian girl, who just so happens to be the Ukrainian girl’s neighbor and rival. Boy is unaware of the protocol for breaking up with Ukrainian girl. So, instead of saying “We need to talk”, or “It’s not you, it’s me”, or “I just can’t do this anymore”, boy breaks the first rule of Fight Club and invites the international media to witness a live performance against Ukrainian girl. The end.
Europe++: Two weeks ago Europe was willing to try one more time to change Trump’s mind about Russia, sending Macron and Starmer to the White House in an effort to see hope triumph over experience. Then came the Zelensky shakedown. Europe finally realized that trying again would be hoping for the triumph of nostalgia over judgment. The week ended with Trump successfully ‘Making America Go Alone’ as leaders of Europe, Canada, and Australia, lined up behind Zelensky.
Investors now face the challenge of determining whether last week’s bizarre turn of events are a significant problem or merely an inconvenience. A problem can derail your investment thesis and wreak havoc on your portfolios, while an inconvenience is like not getting your preferred seat on the un-derailed train. This distinction is complicated by the Trump administration’s unpredictability, which leads to distorted facts as its members attempt to fill in the gaps. Investors must make some sort of sense of what’s going on, so they cobble together a narrative as best they can. They add to it, and reason about it, and the distortions breed distortions, until their forecasts are no longer worth the paper they're written on.
For investors, this means that uncertainty will turn into uncertainty squared. Inflation worries will make a comeback and recession fears will creep into the narratives again, driven by tales of DODGE-induced mass layoffs. In short, if last week wasn’t funny, it would be true, and that’s unacceptable.
Potential triggers for sentiment-driven market moves this week[1]
-
US: Manufacturing and Services PMI data, February jobs report, and Fed speeches.
-
Europe: ECB interest rate decision, January inflation, and unemployment for the Eurozone.
-
APAC: China manufacturing and Services PMI data and GDP growth rate targets for 2025.
-
Global: Peace or no peace in Ukraine and Gaza. Europe, Putin and Xi’s next moves.
[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.
Note: green background = bullish, red background = bearish
Changes to investor sentiment over the past 180 days for the markets we follow:
How to Interpret These Charts:
Top Charts:
The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:
-
A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).
-
A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).
-
A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).
Bottom Charts:
The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:
-
When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.
-
Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.
The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.
Blue Shaded Zone:
The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.
Comments