Investor sentiment shifted as over $16 billion flowed into the S&P 500, reversing a recent trend of risk aversion. This influx has pushed S&P 500 positioning to elevated levels, according to analysts at Citi Research in a note on Monday. Positive economic data appears to have bolstered this renewed investor confidence.
Earlier in August, equity positioning was subdued as investors navigated an environment marked by caution and de-risking. However, last week’s macroeconomic releases, particularly in the United States, triggered a sharp turnaround.
The Producer Price Index (PPI) for July remained flat, signaling stabilizing inflationary pressures after months of persistence. This was followed by the Consumer Price Index (CPI) aligning with market expectations, further reassuring investors of an easing inflationary environment.
These developments have contributed to a more optimistic economic outlook, reducing fears of a prolonged inflationary period and offering the Federal Reserve more flexibility in managing interest rates.
As these positive data points emerged, the S&P 500 responded with a rally, reversing losses incurred during the early August sell-off. This rally not only reflected improved market sentiment but also signaled renewed investor commitment to the equity market, particularly in the S&P 500, which attracted the majority of the new risk flows.
“Net positioning rose across US indexes, with the S&P seeing distinctively larger and consistent new risk flows throughout the week. Notional positioning increased by almost $18 billion, with the vast majority ($16 billion+) coming from new long positions,” Citi analysts said.
“Nasdaq and Russell position flows followed a similar rising trend, but the magnitude of flows was much smaller,” they added.
This influx of capital has been accompanied by a marked reduction in short positions, as the rally pushed all short positions into loss territory. However, Citi notes that the risks associated with these short positions are mitigated by their relatively smaller size.
The Nasdaq, in particular, had been under pressure from long position losses, but these losses have now eased significantly, reducing pressure on investors and improving the overall profit setup for the index.
The resurgence of bullish flows was not confined to U.S. markets. European and Asian markets also saw an uptick in investor activity. In Europe, indexes such as the DAX and FTSE turned net positive, driven by new long positions and the unwinding of shorts.
However, the EuroStoxx remains bearish, as degrossing activity continues to dominate investor behavior in this index.
In Asia, the Nikkei stood out as the index with the strongest bullish flows, reaching levels that Citi describes as increasingly extended. The KOSPI also extended its net long positions, nearing three-year highs.
Meanwhile, the China A50 index remains the most bearish, with limited positioning risks due to underdeveloped short profit levels.
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