AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: FOMC minutes and speeches by several Federal Reserve officials. PMI, building permits, housing starts, and existing home sales data. Earnings from Walmart.
• Europe: UK inflation data. PMI data for France, Germany, Eurozone, and the UK.
• APAC: Interest rate decisions in Australia and China, and inflation data in Japan.
• Global: Ukraine peace talks between the US and Russia (alone!).

Sentiment improved slightly across all markets we follow as investors breathed a sigh of tariff relief (“Folks, he didn’t mean it. Phew!”). Chinese investors remained bullish, riding the government’s market support operations, while individual investors continued to buy into the tech sector. Sentiment among European investors shifted from negative to positive, even after JD Vance’s saucy ignorance of conflicts that happened before he was born left most of the audience at the Munich Security Conference feeling like Jodie Foster in The Accused. Globally, however, the rise in sentiment wasn’t a sign of increased willingness to speculate, more like an involuntary nervous giggle of what-the-heckness. 

Most of the improvement in the ROOF Scores this past week was driven by declining volatility and pairwise correlation levels (mostly in the US) due to the Q4 earnings reporting season. As we shift from company-specific news back to geopolitics as the main headline, these improvements may not last, as geopolitics tends to raise both market risk and correlation while driving down dispersion. Earnings reporting season now seems to be the only time when investors receive some factual information to use in their investment process. Even then, there appears to be an unusual amount of hedging in the guidance given by CEOs this quarter.

Uncertainty is back and likely to keep investors guessing for some time. Since his return to the White House, Donald Trump’s Year Zero style of government has reduced visibility, transparency, and predictability for investors, raising the uncertainty index in several key areas they rely on to make predictions. The Trade Policy Uncertainty Index and the Global Economic Policy Uncertainty Index have both reached new highs. Additionally, Factset reports that the number of S&P 500 companies citing ‘tariffs’ on earnings calls is the highest since Q2 2019. The University of Michigan survey also reports a surge in consumers’ inflation expectations, with the highest jump since December 2016. These uncertainties are reflected in declines in the Indexes of Consumer Sentiment, Current Economic Conditions, and Consumer Expectations, which fell by 11.8%, 13.5%, and 10.5% respectively in January.
 

Bond and equity investors also seem to be at odds with each other on their outlook. Bond investors have been asking for a higher term premium since the election. The rise in gold prices indicates inflation worries, but oil prices have come down, reflecting a combination of hopes for peace in Ukraine and the Middle East, as well as concerns about the strength of the global economy. Conflicting statements on the fate of Ukraine by the Trump administration (Hegseth/Vance vs. Kellogg), mixed with plans for direct US-Russia peace talks this week in Riyadh—to which neither Ukraine nor the EU have been invited (at the time of writing)—and repeated talks of Ukrainian rare earth mineral access for the US, is turning this into some sort of milk-without-the-cow scenario.

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.