It's clear that Real Madrid should be the most likely to defend their trophy. But, as you said, it's weird they got second, not first. Prob Pep's factor is the reason why we're still seeing City at the first place. Also, the funny thing is that Arsenal is more favored. They have smaller odds than Munich, which beat them last season. But the only acceptable reason is probably due to the new coach of Bayern Munich. Still, this looks so strange.
All of that can still change when the season starts because for me it is also not right to put Real Madrid in second place after what Real Madrid achieved last season and also with the current Real Madrid squad. If it is because Pep is still coaching Manchester City, I think it is also not wrong if we consider Ancelotti as a good coach for Real Madrid so that every Real Madrid player is able to play the way he gives. We can see an example when Real Madrid beat Atalanta where in the first half Real Madrid did not play well enough, but in the second half everything changed and Madrid became a team that was able to win.