Sentiment in financial markets

Advisory Opinion

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

Bullish for the US Dollar

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.



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.



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

Bullish for the Bond Markets

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.



Sentiment concerning Volatility



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.

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