Risk Appetite Explained: Measuring Risk-On / Risk-Off or Market Sentiment

Matt Weller (0:04)

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John Kicklighter (0:37)

Welcome to the Trading Global Macro Podcast from StoneX, where we unpack the complex forces driving global financial markets. I'm John Kicklighter, Global Head of Content at StoneX.

Matt Weller (0:47)

And I'm Matt Weller, Global Head of Market Research for StoneX's Self-Directed Brands.

Each week in this podcast, we explore the macroeconomic trends and geopolitical events shaping forex, equities, commodities, interest rates, and more. We're back after a hiatus. For those of you trying to watch the video, you might notice we're nearly sharing screens due to some camera setbacks, but we wanted to be here for you guys to discuss an interesting topic. So over to you, John, what is our topic today?

John Kicklighter (1:17)

Probably one of my favorite topics in my career and through my trading, and that is risk appetite. So risk appetite is something that's probably very familiar to every level of trader, whether you're a professional and you deal with it on a constant basis as a undercurrent of establishing your setups or your overall strategy in personal markets or you are a self-directed individual trader and you're trying to understand the workings of the markets and the weird things that are happening to your trades that frustrates you, short to no end. Very often, there is an element of risk on, risk off that is influencing that market. And when it does, it can be an overwhelming, overriding driver relative to things that we would otherwise think very important, like technical analysis, where we see a chart pattern like you see here on the S&P 500

Or we look at any chart. Very often times, the unexpected happens and you can't tell why. There's no rhyme or reason. Or the fundamental trader.

Oftentimes, we look at the macro picture and we see this theme like AI on the bullish side or the US-Iran conflict, that those are two big ones now on the bearish side right now, are not generating the kind of movement and not just direction, tempo that we would expect. What is that determining factor? That it is often risk appetite. It is often an underlying influence. I consider it to be of a higher order of importance than fundamentals or even scheduled event risk. It can shape and distort their ability to actually move the market. Those events or those themes, sentiment is just the wisdom of the crowd or the fragility of the crowd. I've seen that it's often considered the crowd. Actually, very important in establishing risk trends is to also appreciate that there are different names associated to it. So I think terminology is an important one to understand when you get into anything new.

When it comes to risk appetite, it's also referred to as risk trends or risk on, risk off. That's a really popular one amongst the retail crowd. Sentiment is a frequent one that you see in the financial headlines. And animal spirits is one of the more old hat sayings that references the same thing. It's generally a perspective of the overall market's view. And when I say the overall market's view, each person can have their own individual perspective. It is risk on or it is risk off. There is reason to be frightened or there is reason to be enthusiastic. But what we're talking about here is more reflection on the broader sentiment across the entire market. So there's no way you're going to be able to solicit an opinion from everybody that's participating in the market. Sorry to say. Much less to rank and order their priority. It's whether it's this scheduled event that crossed the wires or this theme that is transpiring, or if it's pure, raw, unadulterated risk on risk off. So it can be difficult to measure. And I think that's going to be what we focus a lot of our conversation on today is the measurement. But before we get into that, it's important to really understand that sentiment and risk on, and animal spirits, these are essentially the same thing. And it is touching upon a genuinely important underlying aspect of the markets. And I think that we need to be mindful of that. What would you add to that, Matt?

That big picture appreciation of risk on or risk off or risk appetite.