The European market in aggregate is down in 2022, represented by the Vanguard FTSE Europe ETF (VGK US), with a breadth of over 1,300 stocks, down -22.1% for the year. As a result, it is not surprising that European short interest increased by $29.6 billion to $236.3 billion in 2022 as short sellers increased their total short exposure in a downward trending market. The $29.6 billion increase in short interest consisted of a $54.3 billion decrease in the mark-to-market value of the shares that were shorted which was more than offset by $83.9 billion of new short selling. Short sellers were “backing up” their profitable bets as the markets fell.

The increase of short selling was consistent for most of the year, regardless of whether the markets were trending upwards or downwards – the short side trading thesis was strong and unrelenting.

European Short Interest: Changes Over Time

From 12/31/22 to 3/7/22 the VGK ETF was down -18.79% and the value of European shares shorted decreased by $40.2 billion. Short sellers increased their exposure during this profitable time period and shorted an additional $59.1 billion of European stocks – more than offsetting the mark-to-market decease in the value of their shorted shares. European shorts were looking to lever up their short side bets, as we saw in the U.S. markets, as markets weakened worldwide.

There was a short market rebound from 3/7/22 to 3/29/22 with the VGK ETF up +15.12%. But short sellers were not unnerved by this short-term reversal of fortune and shorted an additional $28.6 billion of new shares even though the mark-to-market value of their shorted shares increased by $29.7 billion. Short interest increased from both ends, increased short selling and increased mark-to-market value; shorts were doubling down their bets in anticipation of market reversal.

For the next four and a half months the market resumed its decline with the VGK ETF down -20.72%. The mark-to-market value of shorted shares decreased by $65.8 billion, but this time shorts sellers only replaced $16.2 billion of that with new short selling. It looks like shorts were a little gun shy and did not totally reload their short exposure – possibly looking for the market downward trend to flatten out or reverse.

Since 7/14/22 the European market did reverse course and is trending upward with the VGK ETF up +5.10%. The upward market move appreciated the mark-to-market value of European shares shorted by $12.5 billion and shorts almost totally offset that increase in short exposure by buying to cover $10.5 billion of their shorted shares. Shorts were not willing to see their short exposure increase in a market that is rising. But over the last two weeks we see the European markets trending downward again. We will have to see if this recent negative price movement will curtail short covering and lure short sellers to increase their exposure once again.

Not every sub-industry had short covering since 7/14/22, in fact only 52% of sub-industries had increased short covering while 48% had increased short selling. But the average amount of short covering per sub-industry was more than twice as large as the average amount of short selling per sub-industry.

The sub-industries with the largest amount of short covering, and the largest moves by company, are below.

Largest Increase in Short Covering by European Industry

Pharmaceuticals short covering:

• Sanofi (SAN FP) $1.674 billion

• Roche Holding (ROG SW) $349 million

• Novartis AG (NOVN SW) $292

Diversified Banks short covering:

• BNP Paribas SA (BNP FP) $1.248 billion

• Unicredit SPA (UCG IM) $371 million

• Credit Agricole SA (ACA FP) $319 million

Multi-Line Insurance:

• AXA SA (CS FP) $624 million

• Assicurazioni Generali SPA (G IM) $441 million

• Allianz SE (ALV GR) $294 million

Electric Utilities short covering:

• Enel SPA (ENEL IM) $447 million

• Iberdrola SA (IBE SM) $253 million

Wireless Telecommunication Services short covering:

• Vodafone Group PLC (VOD LN) $777 million

• Millicom Intl Cellular (TIGO SS) $82 million

Biotechnology short covering:

• Argenx SE (ARGX BB) $160 million

• Bavarian Nordic A/S (BAVA DC) $86 million

Integrated Telecommunication Services short covering:

• Orange SA (ORA FP) $375 million

• Telefonica SA (TEF SM) $95 million

Specialty Chemicals short covering:

• Givaudan SA (GIVN SW) $650 million

• Symrise AG (SY1 GR) $77 million

The sub-industries with the largest amount of short selling, and the largest moves by company, are below.

Largest Increase in Short Selling by European Industry

Apparel Accessories & Luxury Goods short selling:

• LVMH Moet Hennessy Louis Vuitton SE (MC FP) $840 million

• Cie Financiere Richemont SA (CFR SW) $525 million

Construction Machinery & Heavy Goods short selling:

• Volvo AB B (VOLVB SS) $221 million

• Daimler Truck Holding AG (DTG GR) $143 million

• Alstom SA (ALO FP) $125 million

Aerospace & Defense short selling:

• Airbus SA (AIR FP) $604 million

• Rolls Royce Holdings PLC (RR/ LN) $142 million

Real Estate Operating Companies short selling:

• Vonovia SE (VNA GR) $187 million

• Castellum AB (CAST SS) $131 million

European short interest has been decreasing since the end of the first quarter and after a lull in short selling\short covering in July we have seen a decidedly short covering trend in August.

The Industrial and Consumer Discretionary sectors continue to be the most shorted sectors in Europe by a wide margin.

And the Consumer Discretionary and Industrial sectors, along with Real Estate, are the only sectors with net short selling since 7/14/22.

Short Interest by European Sector

European short sellers have been on a roller coaster ride in 2022 and we will have to see if the recent downtrend will spur the re-emergence of another round of short selling. Short sellers are still betting on continued underperformance in the Consumer Discretionary and Industrials sectors and if the markets continue to slide, we should see increased short selling in the other sectors as well.