Insights from last week's changes in investor sentiment:
Investor sentiment remained very negative or bearish by the end of the week, consistent with the previous week. However, in the UK, sentiment improved from negative to neutral. Chinese markets were closed on Friday when the government announced retaliations against Trump's tariffs, but sentiment was already very negative by Thursday's close. This negativity is expected to turn bearish this week, likely dragging down the sentiment of Global Emerging Market investors as well.
Last week, Liberation Day turned into Liquidation Day as the last bits of risk tolerance in investors that could bend no more finally snapped, sending them running for the exit. Following the tariff announcement, risk aversion has metastasized across global markets as the talk of tariffs crossed the line between long enough and too long. In most cases, such monumental news would merit a thoughtfully orchestrated presentation, carefully constructed to minimize shock while facilitating gradual acceptance. Instead, investors were presented with a simplistic table, backed by a formula born either of desperation or an abundance of free time (trade deficit divided by imports), whose description was like a run-on Henry James sentence that made no sense, and a conclusion that sounded like a joke out of context. “You had to be there”.
There is a certain symmetry among Republican Presidents’ response to a crisis of their own making. Back on August 4, 2002, George W. Bush made the remark "Now watch this drive" right after addressing journalists about the bombings in the Middle East. On Thursday April 3, Trump left the scene of the crime Washington for his Florida properties, golfing and attending events, including a Saudi-funded golf tournament.
Following the tariff announcement, strategists led by Bruce Kasman at JP Morgan noted that the risk of recession has surged to 60% from the previous 40%. Even billionaire Bill Hackman, a strong Trump supporter during the campaign, warned of an 'economic nuclear winter' if the tariffs were not reversed immediately. Fed Chair Jerome Powell also stated that the Fed would pause interest rate decisions until it has a clearer picture of their impact, as these effects “will be significantly larger than expected, and the same is likely true of their economic effects, which include higher inflation and slower growth”. Friday’s stronger-than-expected jobs numbers have provided the Fed with some breathing room on monetary policy decisions.
Sentiment had turned negative since mid-March already, and was decidedly bearish ahead of the tariff announcement, setting the stage for an overreaction to worse-than-expected news. Investors had expected reciprocal tariffs in the 15-to-20% range. Had the announcement on April 2nd stopped at the universal 10% reciprocal tariffs, there most likely would have been a relief rally. Instead, investors stood in shock, staring at the tariff table in abject terror, suspended in a perfect Tarantino moment, before unleashing Armageddon.
As we head into the Q1 earnings reporting season, analysts have lowered their EPS estimates more than normal for S&P 500 companies (-4.2% vs. -3.3% on average in the past 20 quarters) and more S&P500 companies were set (as of March 31st) to issue negative EPS guidance than average according to Factset. This was all before Tariff Gate. The tech industry is now bracing for significant disruption to their supply chain as countries, especially China, retaliate on US companies.
More countries are expected to retaliate this week, setting the stage for even greater market volatility. Yet, investors often react like teenagers who just got their heart broken – they weep and mourn as if their world has just ended, only to be in love again inside a month.
Note: green background = bullish, red background = bearish
Potential triggers for sentiment-driven market moves this week[1]
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US: CPI and PPI data. FOMC meeting minutes.
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Europe: Eurozone retail sales and Germany’s industrial production data. UK GDP estimate.
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APAC: China March inflation and trade data. Japan consumer sentiment data.
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Global: Continued tariff shock from negotiations or retaliations.
[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.
Changes to investor sentiment over the past 180 days for the ten 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:
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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).
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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).
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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:
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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.
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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.
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