Short sellers may turn up the heat on European financial stocks if the current uncertainty in the sector increases, Markit reckons.

With central banks deploying negative interest rates and concerns about economic growth, balance sheets of commercial banks are under strain.

Japan surprised markets with negative rates last week, turning sentiment sour towards major European lenders.

The iShares Stoxx 600, a gauge of European banking stocks, is down by 24% since the beginning of 2016.

Illustrating the point - shares in Deutsche Bank are down 36% so far this year while Societe Generale’s stock has dropped 32%.

UBS of Switzerland is down by 24% and in the UK, Barclays has been the biggest faller, declining by 24% this year.

Despite the underperformance, Markit says few short sellers have jumped on the sector so far.

Stats from the US data firm show that banks, on average, currently see 1.5% of their shares out on loan. 

That's one-third less of that of the average for Stoxx 600 constituents which stands at 2.6%.

So far the gap has shown no signs of closing. 

Demand to borrow stocks of banking firms in Europe has increased by only 9% in the last 12 months, while the rest of the market has seen a 33% uptick in short interest.

Only three European banks currently have short interest north of 5% of shares outstanding.

“Perhaps in the wake of the recent sell off in major European banks, combined with increasing CDS spreads, short sellers may be more tempted to go short financials if the uncertainty in the sector increases,” said Markit analyst Relte Schutte.

ETF investors, meanwhile, are ahead of the curve. 

Over 70 financial ETFs listed in Europe have seen significant outflows since the start of the year, with net withdraws approaching the $1bn mark year to date.

This outpaces the previous largest quarterly outflow of $1.1bn, seen in the third quarter of 2011 when fears of financial contagion gripped European markets.