Earlier we noted [4] that while the rhetoric on a European debacle is particularly negative, it appears positioning for it is actually considerably less bearish in FX markets. From a credit perspective, based on Citi's investor survey, it appears we have a similar picture of breathless anticipation and front-running of some central-planning solution to save the day. As they note, almost all respondents expected spreads, even in USD credit, to widen notably in the event of Spanish and Italian bond yields continuing to crack higher; and yet there was relatively little change in investors' overall net long position - and in USD credit it actually increased. One piece of reality is in European banks where real-money remains notably underweighted, and while leveraged money (hedgies) remains overweight, they have reduced their exposure somewhat recently. Leveraged accounts have reduced their short positions recently in peripheral Europe while real-money accounts are still avoiding it like the plague. The point being that fast money is certainly not going to be the ammo for a short-squeeze in European credit (or FX) that everyone appears to believe it to be.
Overall exposure in credit has surged long in USD, is flat in EUR, and has dropped a little in GBP - despite every one and their mom 'knowing' how bad the situation is in Europe (and its contagious impact)...
[5]
But hedgies remain long European banks (althgough have reduced a little recently) while real-money has retrenched notably...
[6]
What moderate position reduction occurred in Europe seems to have taken place more through selling of names in the core, rather than in the periphery (where shorts seem to have been partially covered). This may be a rational reflection of the likelihood of a bailout being around the corner, or may alternatively just be a reflection of liquidity: you sell what you can, not necessarily what you want to.
And peripheral European short exposure has been reduced dramatically by the hedge fund (leveraged) community (even as real-money remains more in the core)...
[7]
The reported short covering was clearly not sufficient to prevent a sharp widening in Spanish and Italian names this month.
In sum, Citi suggests the survey shows several areas of technical support, but equally shows little sign that investors are really positioned for the sovereign crisis again becoming systemic. As several investors put it, “You’d expect a policy response, wouldn’t you?”