Analysts at Citigroup Inc. believe that investors will build short bets on US equity futures as well as European equity futures in the coming weeks, as the sentiment toward stocks becomes more pessimistic.
As part of a "markedly more bearish swing" last week, traders added nearly $3 billion to their S&P 500 futures positioning and pulled a net amount of $5.1 billion from exchange-traded funds, according to the team led by Chris Montagu. Bets on a decline in the Euro Stoxx 50 in Europe have tripled, although from a low base, according to these analysts.
According to the strategists, the overall positioning remains "moderately" positive, suggesting that time is on the side of the bears and the bets on a downturn in the markets may increase, if the momentum inflows continue to gather pace, according to a note dated Feb. 27. “However, the picture right now may also indicate that investors are not convinced that the recent bearish turn we have seen is going to last forever, they added.
Having climbed sharply at the beginning of 2023, both US and European stocks ended last week with their biggest five-day drops of the year as signs of sticky inflation fuelled concerns that central banks will remain staunchly hawkish in the years ahead. Besides Morgan Stanley's Michael Wilson, there have been a number of other market analysts who have warned that equities are likely to face pressure in March as a result of faltering earnings and higher valuations.
Montagu said separately in an emailed response to questions that “sentiment and conviction are beginning to turn as the current net positioning is positive. But this net long position has been reduced, suggesting that sentiment and conviction are beginning to shift.". “Our model is unable to tell whether this is the beginning of a new trend or if it is just a one-off event.”
The strategists at JPMorgan Chase & Co. said in a note to clients on Monday that equities still provide a poor risk-reward ratio. However, Max Kettner, a senior executive at HSBC Bank Plc, said he believes that there is a greater chance of a relief rally as a result of resilient economic growth as well as pricing in higher interest rates. Despite this, he recommended that investors hedge their equity investments with a mix of cheaper, so-called value sectors or non-rate sensitive defensive sectors and industries.
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