To The Moon

Investor sentiment was largely steady last week as markets balanced mixed economic signals against a shifting global backdrop, with Asia ex‑Japan and Global Emerging Markets staying bullish while Japanese investors remained defensive ahead of the February 8 snap election; in the US, a heavy slate of earnings across tech, consumer discretionary, communication services, and pharma is set to guide near‑term direction, while evolving trade discussions and policy dynamics continue to add uncertainty to the global outlook.

Elsewhere, sentiment stayed largely neutral despite renewed geopolitical tensions, tariff threats, and the possibility of further military action in the Middle East. It’s the law of diminishing returns at work. Once investors have seen how a trade war or diplomatic tensions flare-ups play out, they don’t need to see it again.

Globally, investors are adapting to a G2 world, where broader multilateral forums like the G7 or G20, often take a back seat to US–China dialogue. This dynamic is putting pressure on other countries to navigate carefully or face the consequences of appearing to take sides, with Japan feeling it most acutely: recent comments of support for Taiwan by the new prime minister have heightened tensions with China, pushing investor sentiment in Japan into bearish territory as markets brace for possible economic repercussions. Meanwhile, investors across Asia ex‑Japan, markets whose leaders have stayed quiet on the issue, remain upbeat, maintaining a broadly bullish outlook.

This is the reality of a G2 world, it forces every other ‘G’ to operate like children of divorce - forced to manage parallel relationships, choosing their words carefully, and shifting their economic posture depending on which ‘parent’ they’re engaging with – as the Prime Ministers of Japan and Canada are finding out.

For markets, this means more tactical hedging, more sensitivity to supply‑chain signals, and a constant recalibration of risk as countries navigate between overlapping spheres of influence. Uncertainty is high, yet volatility is at or below long-term averages, not because investors are complacent, but because they’re undecided. Sometimes the fog clouding investors’ judgment would clear, that fog caused by the making and removing of geopolitical tensions. But investors know this is just a timeout as leaders regroup for the next assault, verbal or otherwise.

Closer to markets, investors this week will hear from the visible part of the AI iceberg as the biggest names in the theme report Q4 earnings. But continued rumblings from the invisible side - the private‑credit engines financing much of the AI build‑out - may temper some of that enthusiasm. Also on the radar, any signal from the administration on its nominee for Fed Chair as the countdown to Chair Powell’s May term deadline tightens.

Potential triggers for sentiment-driven market moves this week[1]

• US: FOMC meeting, durable goods orders, and PPI data. Biggest earnings week with Apple, Meta, and Microsoft, IBM, Tesla, and many other blue chips reporting.

• Europe: Eurozone Q4 GDP data and unemployment data.

• APAC: China’s December industrial profits data and manufacturing and non-manufacturing PMI data. Japan industrial production, Tokyo inflation figures, and minutes of last BoJ meeting. Australia’s consumer inflation data.

• Global: Three-way (US, Ukraine, Russia) peace talks in Abu Dhabi, further military action against Iran, and escalation of trade tensions between the US and Canada.

[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 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.