05/09/2022 | News release | Distributed by Public on 05/09/2022 02:51
1 If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.
US investor sentiment (green line) ended the week bearish for the first time since late March on the back of rising geopolitical risks and macroeconomic concerns. The jobs report confirmed the current strength of the economy, but investors remain worried about the negative impact a prolonged period of high inflation could have on both the economy and corporate earnings. The two key sources of higher consumer prices - the war in Ukraine and lockdowns in China - were given a second wind this past week sending risk appetite down as investors take cover. The risk-averse segments of the market are likely to remain more popular until clear signs emerge of a possible truce in Ukraine or declining COVID-19 new infection rates in China.
European investors' sentiment (green line) continued its remarkable recovery since late March ending the week strongly positive, but not yet bullish. Sentiment is now the most positive it has been since September last year, as investors continue to implement risk-tolerant strategies through their sector allocation (red dotted line). The resilience of European investors in the face of a still highly fluid and uncertain situation in Ukraine seems counterintuitive and can only be explained in the face of an ECB that remains dovish and accommodating. Markets fell last week, despite rising sentiment, as investors continued to unwind risk-averse positions they have been accumulating since late November last year, while cherry-picking risk-tolerant ones. Given the sharp contrast between bond yields in the US and Europe, this apparent risk tolerance may be more due to a lack of options than a real choice. Geopolitics this week is sure to test their resolve.
Sentiment among global developed-markets investors (green line) was directionless last week, ending just above the border between bearish and neutral, where it has been for the past two weeks. This is the third attempt at reaching positive sentiment levels after the failures in November 2021 and February of this year. Each failure to rise above this level was met with a test of the previous lows. The fact that markets are down but sentiment has continued to rise these past few weeks simply means that risk-tolerant assets have not suffered as much as risk-averse ones, but it does not signal a return to a bullish risk appetite. US investor sentiment has already fallen back into a bearish state, Japan has been mostly closed for the Golden Week holidays, and sentiment in Europe has been on a recovery path, which helps explain the divergence between sentiment and global markets this past week. More bad news this week on the geopolitical front could turn Japanese and European investor sentiment into reverse as market losses erode their tolerance for risk.
Sentiment among Asia ex-Japan investors (green line) ended the week flat with most investors focused on the threat to the global supply chain from lockdowns in China. Market holidays in China, Hong Kong and Japan kept trading volumes low and most investors on the sidelines. Investors in the region will most likely take their cues from those overseas and will also keep a weary eye on rising US bond yields as an indication that funding costs in the region will soon rise further. Looking at the supply-and-demand balance for risk assets over the past few weeks, demand has been in reverse for the last fortnight and only a continuing decline in risk aversion has kept supply from rising and net risk appetite from falling. This could change as investors return to markets from Tuesday onwards.
Sentiment among global emerging-markets investors (green line) ended the week neutral after declining in the previous week. The twin negatives of higher US interest rates and lockdowns in China is weighing on sentiment and keeping investors wary of implementing contrarian risk-tolerant strategies. As with Asian ex-Japan investors, risk tolerance has been reversing course in the past two weeks and only a flat level of risk aversion has allowed sentiment to remain neutral until now. A strong reaffirmation of China's zero-COVID policy stance over the weekend will dash all hopes for an early end to the lockdowns and possibly lead to further downgrades of the country's economic growth forecasts. For sentiment to remain neutral, regulators will need to communicate the prospect of further monetary and/or fiscal stimulus (i.e., make equities the only choice).
Sentiment among Japanese investors (green line) ended the holiday-shortened week flat. Sentiment recovered strongly in April (from very bearish levels to strongly positive, but not yet bullish), on the back of a depreciating JPY and a dovish monetary policy. A weaker currency is a positive for the Japanese market, but this initial catalyst will have to be followed with stronger global economic growth forecasts to be sustainable. A deteriorating geopolitical narrative will also have a dampening impact on sentiment, potentially causing risk-aversion levels to rise again.
Sentiment (green line) among Chinese (A-shares) investors declined slightly during the only two days the market was open last week. Most of the market and sentiment-moving news happened over last weekend with an authoritative call for the country's zero-COVID policy not to be challenged in any way, dashing hopes for a return to normal in the affected cities. Putin's WW2 Victory Day speech on Monday could also put some pressure on the Chinese leadership to choose a side in this conflict as an official declaration of war from Russia on Ukraine cannot easily be ignored in the official press. Chinese investors are entering the new week in a state of neutral risk appetite and it will be up to the state media to sway them one way or the other.