Global equity positioning weakened further last week as investors reduced directional exposure and added short positions across several major markets, according to Citi strategists.
Strategists led by David Chew said positioning remained comparatively resilient in EuroStoxx and U.S. large-cap equities, but underlying sentiment had become more defensive.
Citi identified increased short exposure in a number of markets, particularly U.S. small caps, Europe and parts of Asia. The strategists said this was creating “growing asymmetry in positioning outcomes,” with the Nikkei, KOSPI and S&P 500 among the markets where short-covering dynamics could become more significant.
Short covering occurs when investors close bearish positions by buying the underlying asset. Citi’s analysis identifies where positioning could amplify market moves but does not establish that such a rebound will occur.
Citi Sees Broad De-Risking Across Markets
Citi said the shift in positioning followed monetary-policy changes from the Federal Reserve and Bank of Japan, alongside higher energy prices and geopolitical tensions.
The strategists described the resulting moves as “one of the most synchronized periods of de-risking observed during the current rate cycle.”
In the U.S., Citi recorded bearish flows across all three major equity indices. According to the bank, the shift was driven mainly by the opening of new short positions rather than investors closing existing long positions.
The Russell 2000 recorded the largest weekly deterioration in positioning across the global markets tracked by Citi, with the bank saying all remaining long positions were currently loss-making.
The S&P 500 and Nasdaq showed comparatively more resilient positioning, as continued short covering offset part of the bearish flows.
S&P 500 Positioning Shows Short-Covering Asymmetry
Citi estimated that approximately 80% of both long and short positions in the S&P 500 were loss-making.
However, because the short book is larger, the strategists said “positioning asymmetry is skewed toward the risk of short covering.”
Under that positioning structure, Citi said even a relatively limited market rebound could result in additional buying if investors begin closing short positions.
This represents a potential positioning mechanism identified by the bank rather than a forecast that the S&P 500 will rebound.
Short Positions Increase in Europe
In Europe, Citi said new short positioning pushed the DAX and the European Banks index into mildly bearish territory.
EuroStoxx positioning remained comparatively constructive, according to the bank, despite recording the largest outflows among the European markets it tracked.
Citi said the principal issue in the region “is shifting from direction to positioning stress,” with long positions across most indices currently showing losses.
The bank identified the DAX as having the weakest profit-and-loss profile among the European markets covered by its analysis.
Asia Remains Most Bearishly Positioned Region
Asia remained the most bearishly positioned region in Citi’s analysis.
The Nikkei continued to have the most negative positioning among major equity markets despite some improvement, while investors added further short exposure in the KOSPI, Hang Seng and China A50.
Citi said short books in the Nikkei, KOSPI and Hang Seng were near historically elevated levels. More than 40% of short positions in both the Nikkei and KOSPI were currently loss-making, according to the bank.
As a result, Citi said “any positive catalyst could trigger a disproportionately large, short-covering rally, particularly in Nikkei.”
The statement describes a potential response to a positive catalyst rather than a prediction that such a catalyst or rally will occur. Citi’s positioning data can also change as investors adjust their exposure.