To The Moon

The conflict in the Middle East remains the focal point as investors try to assess how far the latest oil shock will propagate through the global economy. Since the war began, a steady fog of misinformation has obscured the line between theatre and reality - on both sides. But the economic bill is becoming harder to overlook. Higher energy prices are feeding directly into inflation expectations, squeezing consumers, lifting transport and input costs, and further narrowing already constrained central‑bank policy paths.

At the same time, signs of slowing activity are becoming more visible. Consumer sentiment data released last week showed a further deterioration in household confidence, reinforcing concerns that higher energy prices are already weighing on spending intentions. Attention now turns to this Friday’s US jobs report - the first since the war began - which investors see as a pivotal test of whether earlier signs of labour‑market stagnation are beginning to show up in post‑conflict data. Supply chains are showing strain, risk premia are creeping back into rates and currencies, and growth assumptions are being quietly revised down.

The possibility of stagflation seemed at first impossible to believe – until, little by little, as facts come in, it becomes impossible to ignore.

The unresolved question is whether economic constraints start to intrude on geopolitical choices in an election year. Publicly, both the US and Israel insist the war is nearing its end - that there is little left to strike - and politically they are obliged to say so. But for investors, the return date on this conflict has long since passed. The receipt was lost - and so was the luxury of pretending someone else will own the exit.

Not since Liberation Day have investors confronted a shock with the potential to test an otherwise resilient global economy. That episode lasted days, before tariffs were paused and markets moved on. This one is now entering its fifth week and appears headed for escalation rather than de‑escalation, following the arrival of US ground troops as Iran calls Trump’s bluff.

Before you smash the vase against the wall, it helps to decide whether you are prepared to clean up the shards — or walk away and live with what’s broken. The choice now is binary: stay and fight - accepting the risk of a prolonged war with no guarantee of success - or withdraw, leaving regional allies and global trade flows effectively hostage to Iran.

Investor sentiment has remained firmly defensive. Importantly, sentiment turned from risk‑on to risk‑off before the conflict began, with markets peaking shortly thereafter. Five weeks on, investors continue to implement defensive, bearish strategies across nine of the ten markets we track - even as the war itself is only now entering its fifth week.

The persistence of that positioning reflects how investors are framing the outlook: not as a question of escalation versus resolution, but as a binary choice in which neither staying nor withdrawing offers a convincing path back to risk‑on. Faced with a conflict many wish had never started - and an off‑ramp that still carries material costs - investors remain defensively positioned rather than selectively re‑engaging.

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

• US: March Jobs report.

• Europe: Eurozone inflation report.

• APAC: China PMI data. Minutes from BoJ, RBA, and BoC meetings.

• Global: Ongoing oil shock is priced in. Resolution is not. Escalation is not. TACO is not.

[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.