Market sentiment is defined as the net amount of any group of market player's optimism or pessimism reflected in any asset or market price at a particular time, a kind of collective emotion. The goal of understanding sentiment is to discern when a trend has reached an extreme point and is prone to reverse its direction.
Among sentiment indicators there is the VIX, the CoT Report, Put-Call Ratios, the Ted Spread, Mutual Funds statistics, Margin Balances and Investor Polls- such as FXStreet's weekly FX Forecast Poll.
Advisory Opinion, comprised of arguments and trade ideas which have been committed to publication and therefore have an influence on the trading public, are also considered sentiment indicators. Listed below you have bearish and a bullish arguments expressed by our dedicated contributors on several asset classes.
Sentiment in the Forex Market (US Dollar)
The US dollar is still the global reserve currency, so in economic uncertainties people rush to dollars in a large degree considering it a safe-heaven. The dollar can also act as a funding currency- when times were good people would sell (borrow in) dollars and invest in higher yielding assets, but when global economy starts to fall apart those dollar short positions are unwounded, and the dollar rallies.
A strong currency increases the appeal of a country's bonds and stocks for foreigners. For an American investor, a weak dollar increases the appeal of foreign bonds and stocks.
Currency markets play an important role in the intermarket picture because all asset prices have to be seen in relative terms not only in absolute terms.
Bearish for the US Dollar
Since most times cycle balances themselves out, we could be poised for the next 3 year cycle to be a stretched 3 year cycle just as the dollar is ready to begin its 15 year super cycle decline.
Markets are now having to price the realistic prospect of a Trump victory. In short, that means the dollar is being sold off, safe havens (gold, yen, U.S. Treasurys) are rallying, and risk plays (equities, emerging market assets) are under pressure as shown by the spike higher in the VIX volatility." - Hantec Markets
...we anticipate that economic data will continue to highlight decelerations, prompting the Fed to delay hikes in 2017. While volatility in FX is rising we expect that any USD rally will be unsustainable, especially against high yielding EM currencies.
Bullish for the US Dollar
While most economists are focusing on either the higher US interest rates and a likelihood of a somewhat more aggressive Fed tightening cycle, or the possibility of a dramatically more stimulative fiscal stance. We see the combination (the policy mix) as an exceptionally potent force that will continue to propel the dollar higher. Interest rate differentials provide an incentive structure for investors. Investors are paid to be long the dollar against most major currencies. This also means that for any given level of volatility, it is cheap to hedge European or Japanese exposure.
DXY is now on the verge of a massive breakout higher. More importantly to a higher DXY is the ability for currency prices to finally, after 8 years, normalize.
The biggest fear was that market downside would derail the plans by the Fed to raise interest rates in December, however after the moves and recovery this morning probability is actually now stronger than previously, now up at 85%.
Sentiment in the Commodities Market
A bull market in commodities normally corresponds with bull markets in other currencies than the US dollar because the dollar and commodities are expected to trend in opposite direction (note commodities are priced in USD). Nevertheless, there can be periods when the sentiment is very negative toward bonds, so that safe-heaven currencies like the USD and assets considered an hedge against political uncertainty, like gold, rise together.
Tradicionally, the sentiment towards commodities goes opposite to equities, except during late stage expansion and contraction in the business cycle.
The negative influence of rising commodities on stocks holds true during inflationary and disinflationary periods- but not necessarily during a deflation! In a deflation, rising commodity prices are generally positive for stocks.
Commodities usually trend in opposite direction of bond prices, that is, in the same direction as interest rates. when inflation is expected or experienced, sentiment in the commodity sphere becomes bullish. Positive sentiment in both markets, commodities and bonds, is also good but not for a prolonged time because it's considered inflationary.
Bearish FOR THE COMMODITIES
At the moment the sentiment meter in the platform is showing an astounding 79% [EURUSD] buy signal.
With further strength in equity markets and the dollar, along with continued expectations of higher interest rates, gold could have substantially further to retreat.
Back in early 2013, silver topped after [...] Moving above its 10-week moving average [...] Correcting a bit more than half of the preceding short-term downswing [...] The RSI moved a bit above the 50 level. This time, we have already seen these signals and consequently, silver appears to be ready for the next part of the pattern – a huge decline.
The gold and the stock markets have different drivers. The stock market tends to rise year after year due to population growth, technological developments, and currency inflation. The commodity markets do not benefit from all three. Thus, the stock market tends to rally and then retrace part of its prior advance such as 38% or 50% of the previous bull market. Due to the lack of support from the same drivers, commodity markets can retrace 100% of their prior advance.
Bullish FOR THE COMMODITIES
Yes, we could get commodity infla-tion and slow growth at the same time. But what is the relationship to low-but-rising bond yields? We might better look to demand (and supply) of bonds themselves. Just saying.
... something that could be a real game changer for the price of Gold (and I'm sure Silver too, but as always Gold gets all the attention!), and that is the proposed change to Sharia standards (which are what many Islamic financial institutions follow in whole or in part) to allow Gold to be traded like a commodity and held as an investment.
Sentiment in the Equity Markets
The appetite for stocks is believed to manifest the people's expectations about the economy. But they can also be perceived as a good investment in a deteriorated economic environment.
Here at FXStreet, we are more concerned about the relative return of stocks, which can be positive even in a declining market in absolute terms. That is why a strong currency also increases the appeal of a country's stocks (and also bonds) to foreigners, because the relative return, when translated back to their home currencies is greater than the absolute nominal return.
The opposite is also true when a currency falls, its stock market becomes less attractive to foreigners.
In the same way, if the stock market in one country starts performing better than the stock market in another country, you should be aware that this could lead to a rise in value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market.
Bearish FOR THE STOCK MARKETS
Sectors in U.S. equity markets diverged substantially. Financials and industrials continued to lead, sending the Dow Jones to a new record high while the technology sector was left behind weighing on heavy tech Nasdaq index. If the divergence continues within these major sectors it could send a warning signs to investors that the rally is not sustainable, especially sincelong term fixed income maturities have started to lookattractive.
...after Trump won, we started to see aggressive US Dollar buying accompanied by a rally in stocks. I have said I thought the rally in stocks made little sense given the fact that the prospect for a more hawkish Fed was a disincentive to be long risk.
Coeure said the ECB was far from having to contemplate buying stocks and had never discussed such option, which has been adopted by the Bank of Japan.
...any sign that Apple has reached peak innovation may trigger a wave of risk aversion across the tech sector and more broadly in US equity markets.
Bullish FOR THE STOCK MARKETS
The macro forces we identified, reflation and nationalism that were expressed most clearly in the US election, but were evident before too, is spurring a dramatic shift in asset preferences. The dollar, core equities, and financials are broadly in favor. Bonds, emerging markets, gold, have broadly fallen out of favor.
The magnitude of the US stimulus the investors seem to be assuming will pass a Republican-controlled Congress has spurred a shift out of bonds, emerging markets, and gold.
Three of my [...] research studies show that the recent uptick in volatility is a GOOD thing for stock prices. The statistics suggest we should see outsized stock gains in the months ahead [...] Following a one-day sell-off worse than 2.5% [...] Following a VIX spike of 50% or more [...] More than 80% of stocks are below their 10-day moving average [...] For now, the dominant trend in a majority of stocks is bullish… and so that’s where our bias remains.
Through the earnings season so far, 7 of the 11 S&P sectors have recorded profit growth, while earnings have beaten expectations by nearly 7%. This week’s results will be eagerly followed.
Sentiment in the Bond Markets
It is important to note that bond yields and bond prices go opposite. Furthermore, bonds have several maturities ranging from very short-term 1 week up to 30 years or even more. These two opposite ends of the yield curve may see different supply-demand imbalances, but general sentiment towards government bonds will provide the trader or investor with a general sense for the appetite for that particular asset class. Bonds are the focal point of the intermarket chain and the deepest market compared to equities and commodities.
Any capital flows out of the bond market, is prone to create a sharp move in other asset classes. Market participants are therefore sensitive to changing inter-market relationships involving bonds. Bonds are traditionally considered risk-free investments but demand for government bonds from the public can dry up if other assets are perceived as carrying lesser risk of default. Also central banks can reduce or increase their holdings of domestic or foreign bonds.
Bearish for the Bond Markets
In the 10-year Treasury note futures, speculators tried picking a bottom (top in yields) with a significant move. [...] We suspect some of the late longs are in weak hands.
China is the second-largest holder of Treasuries after Japan but at the moment someone is clearly selling. Perhaps it's one of the Asian powers? We won't find out for months but Treasury-holdings data in the months ahead is must-watch economic news.
... regulations combined with reductions in the trading desks at the banks have greatly reduced the volume of bonds that can be liquidated quickly and easily. The entrance was large but the exit has been shrunk. Thus, the bond market appears very risky from a longer-term perspective.
Despite significant purchases by the ECB and the BOJ, bond yields appear to have bottomed. Deflationary forces in most countries have been arrested. Bond yields have been falling since the early-1980s. This trend may be over. That is what is at stake. We may have entered a new paradigm.
Bullish for the Bond Markets
The reason for the wild jump in yields is the expectation of more fiscal stimulus and rising inflation in the US that will bleed over to other countries. It is a classic case of "Sell on the rumor." [...] For European yields to rise because the US elect-ed Trump is more than silly. It's unsustainable and dangerous. Yields are supposed to respond to hard domestic economic data, right? Like actual inflation.
..my sense is that a counter-trend rally in TBT (upmove in YIELD) is nearing exhaustion [and] that the U.S. economy is increasingly vulnerable to a recession, and/or a flight to safety into, and immediately after, the election...
Global core bonds profited from deteriorating risk sentiment on European stock markets, declining oil prices, and central banks’ “lower for longer” attitude...
Sentiment in Emerging Markets
Emerging markets reflect foreign currency exposure, which could explain correlations between EMs and Dollar Index. It's also important to know that many EM countries depend on commodity exports. For example, a side effect of a rising dollar and thereby weakening commodity prices, is that EM currencies such as the Brazilian Real and Russian Rubble suffer. That's important because weaker EM currencies have a negative impact on EM stocks making these look less attractive for global investors.
Also rising Treasury yields (often associated with a stronger dollar) also reduce the appeal of higher yielding (and riskier) EM assets.
Inversely, they do better when yields are dropping along with the dollar. Look above to the sentiment in the US dollar as it is is part of the reason for money flows into and out emerging assets.
When considering a particular asset class or financial market, instead of versus analyzing the subject in isolation, intermarket analysis includes all related asset classes. It is important to remember that these relationships are dynamic which makes trading applications even more difficult. This page's contents try to go beyond traditional historical intermarket relationships, and to be representative of the current relationships.
Bearish FOR EMERGING MARKETS
... the Chinese authorities have not made much of an attempt to halt the post-election decline in the YUAN, as if to say to Trump that his ascendancy has triggered a natural reaction in the currency markets, a far different situation than orchestrated currency management.
My view is that China’s US bond dump is about demand for US Dollars, which highlights growing concerns about financial stability in the mainland, amidst inflating asset bubbles and burdening bad loan provision.
...if Donald Trump enforces protectionist trade policies, the return of expectations that the Fed[...] will still raise US interest rates in December is strengthening the Dollar and also pressuring the EM currencies.
Right now, the decline in the renminbi is also a reflection of a strong dollar. Since we still see the dollar as the dominant force in the FX world in the coming months, this pair may climb further into record territory. The world may have to get used to a weaker renminbi,
...onshore to offshore flows do not appear be causing severe liquidity problems for Chinese capital markets or wider global risk aversion, but they do point to underlying weakness in Chinese economic confidence and may be contributing to strength in the USD against other currencies.
Bullish FOR EMERGING MARKETS
Once the Yuan stabilises against the U.S. currency, there is an argument for a measured investment, banking on the longer-term strength of the Chinese currency. [...] Will we see a true level of support for the currency, or will the Chinese Central Bank step in to prop up its currency [...]?[...] Should the Chinese step in to support the currency before markets feel its price has been fully corrected, a mid-term rally is unlikely to be in the offing. Market sentiment may, however, be influenced by this and the PBOC may find that its intervention point mirrors expected base-levels of support.
Sentiment concerning Volatility
Bearish FOR VOLATILITY
...what is an exchange rate, what is DXY and EUR/USD. Both are interest rates transformed to an exchange rate. Exchange rate and interest rate are synonomous terms. Fed Funds rates are contained therefore DXY is restricted from movements. Fed Funds is not only the supreme USD interest and overnight rate but regulate Fed Funds is to stifle all USD interest rate movements. To understand this concept is to conquer perfect market knowledge, become a currency trader rather than a person who trades currencies and realization the amount of pablum written is astounding.
Bullish FOR VOLATILITY
The election night tail risk may be in store for export-driven countries like KRW, TWD and CNY.
...if the markets go into free fall on the back of a shock win for Donald Trump [...], or if UK asset prices rapidly decline after Article 50 is triggered early next year, then we could see central banks look the other way, while market volatility plays out organically.
The Forex Forecast Poll
The Forex Forecast is a currency sentiment tool that highlights our selected experts' near and medium term mood and calculates trends according to Friday's 15:00 GMT price. The #FXpoll is not to be taken as signal or as final target, but as an exchange rates heat map of where sentiment and expectations are going.
The CoT Report
The COT provides up-to-date information about the trend and the strength of the commitment traders have towards that trend by detailing the positioning of speculative and commercial traders in the various futures markets. The Commodity Futures Trading Commission (CFTC) releases a new COT report each Friday.