Equity market flows have deteriorated across several major regions, although aggregate positioning has shown less movement, according to Citi’s latest assessment of investor exposure.
The bank’s strategists said positioning in U.S. markets remains moderately bullish, but investors have continued to reduce gross exposure. European flows weakened more substantially, while short positions increased in the Nikkei and KOSPI.
“The dominant theme is the widening gap between weak cash flows and a relatively resilient positioning,” the strategists wrote.
Citi said positioning has not reached levels that would support a broad capitulation scenario. Instead, the strategists identified localised short covering and the unwinding of existing positions as more immediate risks.
Short Selling Offsets U.S. Equity Demand
Citi recorded an increase in short selling in the U.S. during the previous week, offsetting otherwise limited investor demand. Flows into the S&P 500 subsequently shifted slightly towards bearish positioning.
Longer-term positioning is only modestly above neutral and remains below the levels reached in June. At the same time, gross exposure has continued to decline ahead of inflation data.
Around half of long and short positions in both the S&P 500 and Nasdaq are currently carrying unrealised losses, according to Citi.
The positioning profile is different among small-cap equities, where long exposure is more concentrated. Citi said 93% of positions in the segment are currently at a loss, creating the potential for position unwinding if further market weakness occurs.
DAX Short Positions Increase as European Flows Weaken
European markets recorded a sharper deterioration in flows during the previous week. Citi attributed the change mainly to investors reducing long positions in the EuroStoxx and adding short exposure to the DAX.
Overall positioning in the EuroStoxx, FTSE and European banks nevertheless remained broadly unchanged because of offsetting investor activity.
Citi highlighted the DAX in particular, where an unusually large base of short positions has developed. A substantial proportion of those positions are at a loss, with average entry levels below current prices.
The market is therefore “vulnerable to a renewed round of short covering if economic headwinds ease,” the strategists wrote.
Citi Identifies Divergence Between Asian and U.S. Technology Exposure
Investor positioning in both the Nikkei and KOSPI has become more bearish, according to Citi, as short positions increased while investors reduced long exposure.
The Hang Seng and China A50 remained closer to neutral from a positioning perspective, although their flow patterns differed, with Citi reporting renewed weakness in Hang Seng flows.
The strategists also highlighted contrasting positioning in the KOSPI and Nasdaq. Investors have moved towards greater short exposure in the South Korean index while maintaining comparatively more constructive Nasdaq positioning.
Citi said the divergence indicates that investors are distinguishing between regional semiconductor exposures rather than applying the same positioning to the broader artificial intelligence theme.
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