Global Risk Appetite Rebounds 28% as U.S. Policy Boosts Market Sentiment

Global risk appetite has shown a strong rebound, with data from a major U.S. bank indicating bullish signals. The global risk appetite index, which had plummeted to a deep panic level in early April, has since surged to a neutral level. This shift is primarily attributed to announcements made by the U.S. President, which have bolstered market sentiment.

Investors had previously expressed concerns about an economic recession, leading to a significant drop in risk appetite. However, with clear policy signals, market sentiment has improved. The probability of a U.S. economic recession has decreased from a recent high of 66% to 38%.

The bank noted that, apart from the U.S. and Japan, global central banks are likely to adopt accommodative policies. The new emerging market currency sentiment index (EMMI) indicates that the dovish stance of emerging market central banks has reached its most extreme level since the pandemic. Additionally, inflationary pressures are generally mild outside the U.S., providing room for central banks to cut interest rates without significantly impacting currency exchange rates.

Historically, there have been 32 instances in the past 38 years where global risk appetite rebounded from panic to neutral levels. In only four of these cases (1988, 1998-99, 2012, and 2015) did the index fall back into the panic zone. In the remaining instances, market sentiment continued to rise to "euphoric" levels. The bank suggests that in a monetary easing environment, a rebound in sentiment coupled with improved market breadth typically signals the continuation or start of a bull market. While history does not guarantee future outcomes, current evidence points to a potential for further market gains.

Regionally, risk appetites vary significantly. In India, South Korea, Indonesia, and Thailand, risk appetites remain close to or slightly above the panic threshold, indicating low investor sentiment and potential rebound opportunities. In contrast, Singapore, the Philippines, South Africa, Poland, and Mexico have risk appetites nearing or entering the "euphoric" zone, suggesting overheated markets and potential risks of correction.

Despite the positive short-term market sentiment, long-term challenges persist. Weak corporate earnings and sluggish economic data continue to pose threats, and discussions around long-term stagnation may resurface. Investors are advised to remain cautious and consider the broader economic context when making investment decisions.