The DAX is singled out as the market most likely to see squeeze-driven gains in the weeks ahead
Citi has warned that European stock markets face a growing risk of short squeezes, as investors caught betting against rising prices are forced to buy back their positions.
The US bank said global equity positioning remained supportive of further gains, but that regional differences were becoming more pronounced.
A short squeeze occurs when traders who have bet on falling prices are forced to buy shares to close their positions, pushing prices higher still.
In the United States, the bank said risk appetite and short covering were sustaining bullish positioning.
However, that exposure was becoming increasingly concentrated.
Positioning in the Russell 2000, an index of smaller US companies, had reached extended levels, Citi noted.
In Europe, improving sentiment and easing concerns over energy prices had encouraged investors to open fresh long positions while also unwinding bearish bets.
The bank singled out Germany's DAX index as the region's most likely source of further squeeze-driven upside.
Positioning across Asia was less uniform.
South Korea's KOSPI index had seen a meaningful rebuild in bearish exposure, according to the bank.
The recent rebound in Hong Kong's Hang Seng index had been supported by the unwinding of profitable short positions.
Taken together, Citi said the balance of risks pointed more towards incremental short squeezes than towards broad-based selling by investors looking to reduce risk.
The analysis draws on the bank's positioning model, which tracks how investors are placed across major equity markets to gauge where crowded trades might unwind.
Such models are widely used to identify markets vulnerable to sharp moves when sentiment shifts.
Concentrated positioning can amplify price swings, as a change in direction forces large numbers of investors to adjust their holdings at once.
