Axioma ROOF™ Score Highlights: Week of April 14, 2025

Insights from last week's changes in investor sentiment:

Investor sentiment remains predominantly bearish across most markets, with the exception of Australia, as gold prices continue to rise, and the UK, where investor sentiment remains surprisingly neutral. Chinese investors have become bearish due to the escalating tariff war with the US, which has also negatively impacted sentiment among Global Emerging Market investors. The inconsistent trade policies from the Trump administration have further added to the confusion and uncertainty, causing many investors to head for the sidelines, selling off risky assets without purchasing safe ones. This is not a rebalancing. This is a de-risking.

If you're a proponent of global or even just US economic growth, you wouldn't disrupt the global trade system by tossing a tariff grenade into it. Therefore, there must be another agenda at work here beyond America First. During his first term, Trump asked other countries to join him in his trade war against China, but they refused. Their supply chains were too dependent on China, and siding with America would have been economic suicide. Today, the same reasons for not picking sides remain valid, as their dependence on China hasn't lessened (that’s on them). Only if a greater economic threat emerges will countries reluctantly side with America against China. Enter Trump and his infamous tariff chart. For Trump, if he can't form a coalition of the willing against China, he’ll use economic force to assemble a coalition of the reluctant, even if he has to drag them kicking and screaming into it.

And how is that working so far? Not too well. There has been retaliation, tariffs being matched like for like, but for now there has been no talks. Xi preferring instead to suffer these indignities with the perfectly nuanced silence of someone silently suffering an indignity. After multiple attempts to use pretty lies about the past to hide the ugly truth of the present, the strategy has somehow folded in on itself, becoming a victim of Trump's impulsiveness, and now resembles a trade policy in perpetual search of context. His only argument for confronting China in this way is that the rest of the world would if they could, but they can’t, so he should.

In response to the confidence crisis his inconsistent tariff policy has created, investors have adopted the investment equivalent of the fetal position, selling off US treasuries, the USD, and US equities in a massive ‘flight-to-sanity’ move, fleeing to the safety of the Euro, the GBP, the Japanese Yen, and Gold. This sort of capital flight is usually reserved for emerging markets. Remember when the yield on US Treasuries was hailed as the risk-free rate? That was last month.

And then there's Iran. In warfare, maintaining the element of surprise is crucial. So, what should we make of Trump's decision to deploy six stealth bombers to Diego Garcia and leave them ‘unsheathed’ on the tarmac for anyone with satellite access to see? Clearly this was designed to force negotiations. These have now started, but like Putin and Xi, Iran will play for time, adding one more layer of geopolitical uncertainty for investors to worry about[1].

Last November’s Red wave victory by Trump and the Republicans was seen as a golden opportunity for business, the economy, and the markets - a government of the billionaires, by the billionaires, for the billionaires. Just as the Founding Bankers intended. What could go wrong? Since November, investors had been eagerly aligning their portfolios with this optimistic outlook. Then came Liberation Day. Since then, they have been jolted by a harsh new reality as markets swerved off course, careened over a cliff, and plummeted into chaos, with investors’ portfolios in the back seat, unbuckled, tumbling and screaming all the way down. Any attempts at hedging or diversifying risk, a pitiful and ultimately futile effort - a few measly sandbags against a tidal wave of uncertainty and confusion. At this point, trust is gone. Even backtracking isn’t going to bring it back (he’s tried). The only question now is whether this uncertainty has spread to the corporate world, and if so, will it infect the economy?

[1] Learn how to incorporate geopolitical risks in your investment process here.

Note: green background = bullish, red background = bearish

Potential triggers for sentiment-driven market moves this week[2]

• US: Retail sales and industrial production data. Earning announcements from Goldman Sachs, Bank of America, and Citigroup, Johnson & Johnson, Abbott Laboratories, American Express, Blackstone, UnitedHealth Group, and Netflix.

• Europe: ECB interest rate decision meeting. UK inflation data. Germany economic confidence index.

• APAC: Japan CPI data. China Q1 GDP growth, industrial production, retail sales, and fixed asset investment data.

• Global: Will the uncertainty and confusion on tariffs from the White House lead to a lack of guidance from CEOs as to the economic cost of the Trump administration’s trade war?

[2] 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:

• 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.