The rollercoaster continues.
Whatever slight bearishness appeared in the sentiment data last week has largely evaporated following the rally in the second half of the week.
Three points stand out.
First, the Tech bounce has not triggered a cyclical sell-off.
That is different from the pattern of the previous two months, when we saw a clear rotation out of cyclical growth and into secular growth.
Tech performed better over the past few days, but so did several of the cyclical assets we recently highlighted for bearish sentiment: US Value, Industrials and European equities.
Second, the remaining geopolitical risk premium is being priced out.
In many ways, this has been a textbook market response to a geopolitical shock. The initial reaction was fast and emotional, with risk premia expanding across assets. Much of that move then reversed almost as quickly.
That is not unusual. Geopolitical shocks often create short-term dislocations, but those moves rarely persist unless the situation escalates into a meaningful hit to global profits.
The Geopolitical Risk Index captures these spikes in perceived stress. Historically, they have been followed by strong short-term equity returns. When the GPR rose above 300, the S&P 500 delivered above-average returns over the following month 81% of the time. It proved a useful trigger level again.
The GPR has already been trending back towards its long-term average of 100, and the weekend’s news is unlikely to change that pattern materially.
A reopening of the Strait of Hormuz and the removal of the remaining geopolitical risk premium bring me back to those unpopular cyclical assets. This was one of the catalysts that could challenge the bearish consensus narrative identified in our recent Sentiment Ideas note.
The fact that these assets performed well alongside Tech last week is a positive indication that investor appetite is returning.
From a sentiment perspective, that move could run further before meeting a headwind — provided the macro data remains supportive.
Third, our Risk-On / Risk-Off aggregates have rebounded, but not much
That includes our higher-frequency version, based only on daily and weekly inputs, and the broader aggregate, which also includes slower-moving monthly indicators.
The higher-frequency aggregate is back at the 50th percentile, and the start to this week suggests it will move further into bullish territory.
Even then, sentiment would remain only slightly bullish. That makes for a constructive setup. All else equal, sentiment is not currently a barrier to risky assets performing well over the coming months.
We remain well below the bullishness seen at the start of the year — and further still below what has historically represented a sell threshold.
Top 3 This Week
- Sentiment: at most slightly bullish
The overall sentiment setup remains supportive for risky assets.
- Cyclicals coming back into favour
Cyclical assets are benefiting from the latest rotation. But the moves in both performance and sentiment remain small compared with the previous bearish shift — and small compared with last autumn’s rotation.
- CAD sentiment close to previous lows
CAD sentiment has fallen to the 5th percentile alongside the currency’s depreciation. There is not much further to go in sentiment terms. It is one to watch for catalysts that could challenge the bearish consensus narrative.