European stocks are improving on the pronouncements by European financial leaders to adequately address Europe’s economic malaise. This is causing hedge funds who made significant bets on economic trends to unwind their short positions.
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Short interest on the Stoxx Europe 600 Index has fallen from 3.4% in May to 2.9%, indicating that hedge funds failed to act ahead of market moves on the announcements in June that European leaders would indeed act, if necessary.
Hedge fund action was also quick in April just before the Stoxx 600 made a 35% move up. As a result of the slow response to market changes, macro funds have returned only .1% this year compared to returns of 8.1% in the MSCI World Index of equities in developed countries.
Just last week, the Euro Stoxx 50 gained 2.1%, bringing its return so far this year to 5%. Funds hedging against equities have suffered significant losses with some funds returning up to 25% of the money investors put in after returning only 1.6% January to July.
Although investors have retreated in their conviction to short equities, they also are not confident about going long. As well, distressed countries like Spain and Italy banned short sales as share prices on their banks fell to record lows.
Instead, investors are seeking safe havens like German bonds. This move has pushed interest rates in Germany into negative territory. This means investors are essentially sticking their money in German bond mattresses, satisfied to keep it there even if they receive no returns.
Despite the dry-up in short positions on European stock markets, a recession in Europe is still in process. Eurozone countries currently experiencing recession include Greece, Italy, Portugal, and Spain.
Even Germany’s growth is slowing. Germany is responsible for approximately 27% of Eurozone growth and analysts forecast growth in Europe
will be half that of growth in the US in both 2013 and 2014.
Hopefully, comments by ECB president Mario Draghi will put in a floor to Europe’s economy, enabling it to at least begin a recovery from some point in the near term. That would also help speed the recovery in the US.