Investor sentiment toward stocks is becoming more pessimistic as they build short bets in both US and European equity futures, according to Citigroup Inc. strategists.
In a “markedly more bearish” swing last week, traders added nearly $3 billion of new shorts to S&P 500 futures positioning and pulled a net $5.1 billion from exchange-traded funds, the team led by Chris Montagu said. In Europe, wagers on a decline in the Euro Stoxx 50 tripled, albeit from a low base, they said.
Overall positioning remains “moderately” positive, suggesting there is potential for the bets on a downturn in markets to increase, should the momentum in flows gather pace, the strategists wrote in a note dated Feb. 27. On the other hand, the picture right now could also indicate that investors “are not convinced about the recent bearish turn,” they said.
After a sharp rally at the start of 2023, both US and European stocks ended last week with their biggest five-day drop this year as signs of sticky inflation fueled concerns that central banks will remain staunchly hawkish. Other market strategists including Morgan Stanley’s Michael Wilson have also warned that equities face pressure in March from faltering earnings and higher valuations.
“Current net positioning is positive, but this net long position has reduced — this suggests that sentiment and conviction is starting to turn,” Montagu said separately in an emailed response to questions. “From our model, we can’t tell whether this is the start of new trend or a one-off.”
JPMorgan Chase & Co. strategists said in a note on Monday that the risk-reward for equities remains poor. Max Kettner at HSBC Bank Plc, on the other hand, said he sees a higher chance of a relief rally amid resilient economic growth and as expectations of higher rates are priced in. Still, he recommended equity hedges including cheaper, co-called value sectors or non-rate sensitive defensive sectors and industries.
--With assistance from Michael Msika.
This article was provided by Bloomberg News.