Investor Appetite for Small Caps Increases Following Fed Rate Cut, Says Citi

Investors have been increasing their long positions in the Russell 2000 following the Federal Reserve’s first rate cut in several years, as highlighted in a recent weekly report from Citi.

Short positions in the small-cap index are currently facing an average loss of 5.7%, suggesting that a short squeeze could lead to further gains in the near term, according to Citi strategists.

The S&P 500 is exhibiting similar trends, while investor sentiment towards the Nasdaq 100 appears more neutral, with net positioning remaining close to balance.

Citi’s strategists noted that the previous week experienced significant volatility due to Triple Witching, which created considerable roll activity in tandem with the FOMC rate decision.

Market volatility spiked after the 50 basis point rate cut from the FOMC, but US futures markets quickly began to recover overnight. This rebound was bolstered by inflows into exchange-traded funds (ETFs) and the establishment of new long positions in US markets. However, there continues to be a noticeable divergence in investor risk appetite for US equities, as evidenced by the flow patterns from the previous week.

In Europe, positioning in the Eurostoxx has remained neutral, with mixed flows observed in recent weeks. Although ETF inflows have been consistent, their overall volume remains modest, and there has not been a definitive positive or negative trend in Eurostoxx flows during this period.

In Asia, significant shifts in relative positioning were noted in Europe, Australasia, and the Far East (EAFE) as well as emerging market (EM) futures. These changes were more pronounced than typical for a roll week, leading to EM futures transitioning from neutral to the third most extended long position, while EAFE futures moved from mildly bullish to the second most extended short.

For China A50 futures, net positioning remains heavily bearish; however, a bullish trend started to develop last week as investors began adding new long positions to counterbalance profitable shorts.

Conversely, most short positions in the Hang Seng have been unwound, leaving the market predominantly long, with average long positions currently reflecting a profit of 4.2%.