Short interest in European markets increased by +$11.5 billion, or +5.4%, to $222 billion in January 2022. The increase in shares shorted was a reaction to downward-trending European markets in January, as the Bloomberg European 500 Index, Stoxx Europe 600 Index and S&P Europe 350 Index were all down over -3% for the month. The +$11.5 billion increase in short interest was made up of +$23.0 increase in additional short selling, offset by -$11.5 billion of mark-to-market price moves on existing shares shorted. Short sellers pressed their bets and are trying to catch a dip in markets that trended upwards for most of 2021.

The sectors with the largest increase in short exposure were Financials (+$3.5 billion), Energy (+$3.2 billion) and Health Care (+$2.5 billion). There was only one sector more than a $1 billion decline in short interest, Consumer Discretionary short interest was down -$1.1 billion.

Short exposure continues to be concentrated in several sectors: Industrials ($35.2 billion), Consumer Discretionary ($30.3 billion), Financials ($27.0 billion) and Health Care ($27.3 billion).

Short Interest by European Sector

Market wide Short Interest as a % of Float continued to reside in the 3.60% to 3.80% range, which we have seen since the end of July 2021. Short Interest % Float declined slightly, decreasing by -3 bps from 3.75% to 3.72%. But there were several sectors with larger-than-average declines as short sellers reallocated their short exposure to some of the more larger cap securities in the sectors. The Consumer Staples sector had a -0.83% decrease and the Utilities sector had a decrease of -0.79%. The Financials sector was the only sector with a large upward move in SI % Float, increasing 0.36% to 2.48%.

The S3 SI % Float, which includes the synthetic long shares created by every short sale in the denominator, fell just -1 bp over the quarter, from 3.45% to 3.44%.

S3 Short Interest vs. Traditional Short Interest

European stock borrow fees remained fairly stable in January, with the average stock borrow fee declining by -1bp to 0.74% fee.

Stock Borrow Fees by European Sector

High stock borrow fees can test the conviction level of short sellers as financing costs can take a large bite out of expected Alpha. The highest stock borrow fees, as of January 31st, for stocks with over $50 million of short interest were:

European Stocks with the Highest Borrow Fees*

*With at least $50mm in Short Interest

Short sellers were up +$11.13 billion in fourth quarter mark-to-market profits, +5.14%. With the three major European indices down in the -3.0% to -3.9% range, short sellers outperformed the market significantly by being good stock pickers.

There were 3,210 shorted equities with positive P\L, producing +$15.68 billion in mark-to-market profits, up +11.05% for the month. The five largest short-side winners in January were: Sika AG (SIKA SW +$582mm), Atlas Copco AB (ATCOA SS +$297mm), Schneider Electric SA (SU FP +$281mm), Clarivate PLC (CLVT US +$227mm) and Givaudan SA (GIVN SW +$213mm).

There were 1,468 shorted equities with negative P\L, producing -$4.55 billion in mark-to-market losses, down -6.00% for the month. The five least profitable short-side trades in January were: TotalEnergies SE (TTE FP -$533mm), BT Group PLC (BT/A LN -$183mm), Vodaphone Group PLC (VOD LN -$151mm), AXA SA (CS FP -$127mm) and BP PLC ADR (BP US -$88mm).

Profitable short trades outnumbered un-profitable short trades by more than 2-1 with 61% of all short positions adding positive numbers to a trader’s bottom lines, 28% with negative numbers and 12% were flat for the month of January.

The most profitable sectors on the short side were Health Care (+10.83%) and Information Technology (+10.59%) while the only sector with an total monthly loss over one percent was Energy (-8.65%).

European Short Selling $P/L by Sector (January 2022)

Crowded shorts can add increased risk and\or cost to a portfolio. Crowded short can also be the reason behind trade execution difficulties. Identifying these crowded securities can increase portfolio efficiency and minimize enterprise risk. The most crowded shorts in Europe, with S3 Crowded Scores over 80.00/100.00 and short interest over $100 million are shown in the table below.

Most Crowded European Shorts*

*With at least $100mm in Short Interest

Recent mark-to-market short-side losses in some European securities have increased their short squeeze risk. The S3 Squeeze Score identifies these securities and alerts both long shareholders and short sellers that the necessary ingredients for a short squeeze not only exist but are increasing the likelihood of a short squeeze. Two of these stocks are Hammerson PLC (HLSO LN), with a Squeeze Score of 87.5/100, and Zur Rose Group AG (ROSE SW), with a Squeeze Score of 85/100. Higher than average S3 Short Interest % of Float, Days to Cover and recent mark-to-market losses make these two stocks strong candidates for a short squeeze if their stock prices continue to trend upwards.