China Bullish Flows Persist as US Sentiment Rises Following Jobs Report: Citi

Investing.com – Positioning in the FTSE China A50 index became significantly bullish last week, according to Citigroup strategists.

This change is partly attributed to investors reversing previously profitable short positions, although recent activities have shown that some of these reversals are occurring at a loss. Nonetheless, the notable increase in open interest indicates that investors are actively enhancing their long positions, thereby taking on additional risk.

In comparison, the positioning in Hang Seng futures was already extended prior to last week, leading to more mixed flows recently. Despite this, both the FTSE China A50 and Hang Seng indexes are witnessing strong bullish positioning, as investors have been increasing their exposure to the Chinese market over the past few weeks.

Citigroup strategists noted that this situation could lead to greater sensitivity to unfavorable surprises moving forward. However, they also highlighted that investors have been capitalizing on the market rally, with long positions enjoying an average profit margin of 22.5% for the A50. Even a 20% decline in the index would leave half of the long positions still in profit.

Meanwhile, US markets experienced a decline in bullish sentiment for most of last week, although there was a more constructive flow on Friday following positive news in US job numbers, which renewed expectations for a soft landing.

In the S&P 500, positioning remains highly extended at +3.0 on a normalized scale of 5, which sharply contrasts with the Nasdaq 100, which has stayed near neutral for several weeks.

The Russell 2000 experienced the most drastic shift, moving from a very bullish stance two weeks ago to a near-neutral position, driven by a combination of unwinding long positions and increasing outright short exposure.

Overall, Citi noted that US markets are experiencing relatively modest average profits and losses, alleviating pressure on current positions. The Nasdaq 100 reflects a balance between long and short positions, suggesting that positioning could amplify volatility in the near term, whether through unwinding shorts during a rally or longs during a sell-off; each scenario could intensify the initial market movements.

In Europe, positioning in the Euro Stoxx 50 index remains close to neutral. Over the past month, bearish sentiment has decreased, but momentum has stalled, with investors not transitioning to net long positions. Citi indicated that investors are likely adopting a more selective approach towards their European exposures, as evidenced by sector-specific exchange-traded fund flows.