Goldman Sachs – European Equities Deepen Weekly Slump as Shorted Stocks Decline
European stocks fell on Friday, as the region’s most-shorted shares retreated in a reversal of gains that were sparked by a wave of short covering amid a brawl between day traders and hedge funds.
The Stoxx Europe 600 Index closed down 1.9% in London, with all sectors in the red as the gauge marked its worst weekly slump since October. A Goldman Sachs Group Inc. basket of Europe’s most-shorted stocks retreated, with earlier favorites such as Varta AG and CD Projekt SA down more than 16%.
European stocks have fallen 3.1% this week, leading the benchmark to record its first monthly decline in three amid tighter lockdowns, vaccine snags and U.S. retail trading volatility. Investors are assessing valuations after the Stoxx 600 reached an almost 11-month high on Jan. 14.
“The end of January can often be a bit of a profit-taking moment, especially in some taking profits made in November/December,” said Chris Bailey, a European strategist at Raymond James. “And a bit of selling can lead to a bit more. But it can also give an opportunity for buying too, as we saw in some of the trading yesterday.”
Stocks are ending January on a low note after rallying on bets of a vaccine-fueled recovery at the end of last year. Defensive darlings such as technology and telecom shares are up the most among sectors this month, while miners have also outperformed. Insurers have fared the worst. Nevertheless, many strategists are bullish on longer-term prospects, recommending that investors buy the dip.
Europe’s heavily shorted names showed signs of fatigue, after surging earlier this week in a spillover from the day trader-fueled rally in GameStop Corp. in the U.S. The video game retailer jumped anew on Friday after brokerage Robinhood Markets said it would lift some trading restrictions.
Europe’s Most-Shorted Stocks Drop as Short Squeeze Subsides
Retailers were among the worst Stoxx 600 performers on Friday, after Hennes & Mauritz AB warned it’ll be difficult to make a profit this quarter due to lockdowns.
Some stocks bucked the trend. Ericsson AB climbed after the company reported better-than-estimated fourth-quarter profit.
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— With assistance by Ksenia Galouchko, and Sheldon Reback