A general theme in our Market Insights over the past several weeks has been one of quiet confidence that the rally in global risk assets would continue, notwithstanding the very obvious escalation of geopolitical risks centred on, but certainly not limited to, North Korea and the equally obvious overvalued nature of key equity indices, especially in the tech sector.
This perspective was informed by the subdued nature of crowd sentiment towards global equities, reinforced by a global macroeconomic picture that was widely perceived as benign. (In early June we labelled this the Goldilocks scenario: economic growth was viewed by the crowd as “neither too hot nor too cold” and inflation pressures moderate.)
Looking at the current constellation of crowd sentiments towards these two economic topics nothing much has changed. As confirmed by the exhibit below, growth sentiment readings across the 100+ countries we track remain generally close to historically neutral readings.
Exhibit 1: Crowd-sourced Sentiment – Economic Growth
The only major standout is Qatar (one needs to squint), where sentiment has plummeted as a direct response to the trade blockade by several neighbouring Arab states – a standoff that has been more prolonged than many, including those that instigated the measures, expected. This political crisis may be problematic for the region, but the global ramifications appear very limited with neither side strongly incentivized to see it escalate further.
Similarly, when we look at the latest sentiments towards future inflation it is clear the crowd continues to view global price pressures as modest, with most of the heat map tinged a shade of blue – see exhibit below.
Exhibit 2: Crowd-sourced Sentiment – Future Inflation
As we noted at the time, the perception that the global inflation outlook remains subdued is a crucial support for global asset prices because it provides central banks with the scope to withdraw monetary stimulus at a gradual and measured pace, thereby reducing the risk of a more abrupt policy change.
Indeed, the sensitivity of asset prices to monetary policy was clearly demonstrated just a few weeks back when central banks in several leading countries started murmuring about the need to begin dialling back stimulus. This prompted speculation about a possible coordinated policy shift that caused government bond yields to pop higher and equity markets to falter.
However, as so often happens in finance, correlation was confused with causation. A global coordinated monetary tightening was a fallacy as subsequent policy announcements have clearly demonstrated. While the Bank of Canada (BoC) hiked its key interest rate for the first time in over six years this month, the Bank of Japan (BoJ) pushed out the timeline by which it expects to achieve its 2% inflation goal to FY2019 and re-emphasized its commitment to maintaining an accommodative monetary stance. Additionally, the same day the BoC hiked, Fed Chair Yellen expressed “uncertainty about when (and how) inflation will respond to tightening resource utility” in testimony before Congress – a comment that read dovishly in light of the continued undershoot of US inflation relative to target.
On balance, therefore, the baseline scenario for global risk assets remains favourable. Nevertheless, one must always be cognisant of possible risks, and for reasons just mentioned, the most important in our view is an upside inflation surprise.
With this in mind, it is worth highlighting the evolution of crowd perceptions towards crude oil. In the past several months, crowd sentiment fell markedly, a shift that weighed on the crude oil price to such an extent that by mid-June it was formally in bear market territory. However, because sentiment was fairly elevated when the move began, the decline only takes it back near its long-run average suggesting the crowd is fairly neutral at this point.
Exhibit 3: Crowd-sourced Sentiment – Crude Oil
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That said, when we drill-down (no pun intended) into more granular sentiments towards crude oil, a notable shift is occurring, especially in relation to how the crowd perceives future supply and demand imbalances – see exhibit below. Sentiment towards future net oil supply peaked in March (orange line, left hand scale) a sign that mainstream and social media collectively considers the supply overhang to be diminishing.
Exhibit 4: Crowd-sourced Sentiment – Crude Oil Future Net Supply
Moreover, as shown in the lower exhibit, the predominant individual emotion expressed by the crowd towards crude oil is Anger. Conversely, Joy is extremely low. This negative emotional polarity is more typically associated with the bottom of a stylized investor psychological cycle and is somewhat reminiscent of what we saw back in mid-January 2016 when we correctly anticipated the ending of the major downtrend.
This provides an interesting backdrop to Saudi Arabia’s announcement on Monday capping its oil exports at 6.6 million barrels per day. Talking heads have, on the whole, been sceptical about the effectiveness of Saudi Arabia’s actions to eradicate the supply glut. However, crude oil prices have jumped since the announcement, a reaction that chimes with the recent shift in crowd sentiment suggesting this could be the start of a more sustained rally in crude oil prices.
For the broader investment community, the pertinent question then becomes what would be the market reaction to rising crude oil prices? Could it unsettle the crowd’s conviction in the Goldilocks scenario and therefore jeopardise a key support for global risk assets?
One is awfully tempted to say no. Central banks have a long track record of looking through the first-round inflation/disinflation impulses generated by rising/falling oil prices, something that investors should both recognize and appreciate. But, (isn’t there always a but), given the current high sensitivity of asset prices to monetary policy changes, rising crude oil prices could quickly be added to the “worry list” for global risk assets. Whether this worry actually translates into weaker global asset prices will very much depend upon how crowd perceptions of future inflation evolve – something we will be keeping a very close eye on over the coming weeks and months.
 Recent media reports that the UAE was behind the hack of the Qatari official news agency in June created some noise but nothing more. For instance, in protest the Qataris could have shut off the Dolphin gas pipeline that pumps 2 billion cubic feet of gas per day and supplies nearly a third of UAE domestic electricity needs but the gas continues to flow. (This gas supply was – surprise, surprise – excluded from the trade blockade.)
 See: https://www.amareos.com/financialresearch/the-market-sentimentalist-monetary-delusions/ . Two new members to the BoJ board were quoted in the media as saying talk of an exit plan would be premature, indicating an ongoing dovish policy tilt.
 Saudi Arabia also called for greater compliance with existing export caps from other members (excluding Nigeria and Libya who are exempt).
 Part of the reason for this scepticism is the expectation that higher crude oil prices will simply reinvigorate US shale production which has surged over recent years to more than 5 million barrels per day. However, this response may not be quite as robust as assumed. US shale producer Anadarko announced a greater than expected loss when it reported this week, and – significantly – cut its capex budget by USD 300mn – news that did not go down well with its shareholders. Given how responsive fracking supply is compared with traditional extraction methods (months rather than years), any deceleration in US shale drilling would quickly impact global oil supplies.