Risk appetite is a critical driver for markets to move higher or lower. If risk appetite is increasing (falling), there should be a greater (lower)demand for risky assets. State Street does a good job of providing an aggregate risk appetite measure given their knowledge of customer flows. They normalize 22 indicators which include: equities, bonds, currencies, commodities, and asset allocations.
The August report that provides information from July shows that there was a strong directional flow toward risk especially in the second half of the month. The increase in appetite is one of the strongest in years and is near the highest level in a year. Unfortunately, August has become a true problem for those same investors. Appetites change but the food served up for that appetite may not be appealing.
Risk appetite is a good coincident indicator or conforming indicator but may not always be predictive if there is a quick shock to sentiment.
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