In the largest sell-off of European stocks by hedge funds in a decade, investors pulled back significantly during March and April, according to a report by Goldman Sachs. The main factors behind this shift were President Trump’s proposed tariffs and the strength of the euro, which threatens Europe’s export-driven economy. The companies in the STOXX 600 index, many of which derive substantial revenue from international markets—particularly the U.S.—were especially vulnerable to these pressures. In the two months prior, hedge funds reversed their long positions, which had initially expected stock prices to rise, and instead took on short positions, betting that European assets would decline.
During March and April, traders sold European stocks for the majority of the days, focusing particularly on sectors sensitive to tariffs, such as the auto and luxury goods industries. The luxury goods sector saw an acceleration in selling after disappointing earnings reports, further driving down stock prices. Additionally, hedge funds maintained defensive positions, betting that European indices would fall. These trades were particularly concentrated around the 90-day tariff pause announced by President Trump in early April, causing hedge funds to adjust their strategies. As a result, hedge funds held the largest amount of short positions since 2019.
Despite the overall bearish sentiment, hedge funds softened their stance on European pharmaceutical stocks mid-April, though they returned to a more negative outlook by the month’s end. On the other hand, hedge funds increased their positions in European defense companies, with a notable shift toward long positions. By the end of April, hedge funds had four times as many long positions in defense stocks as short positions. German companies, particularly steelmakers, were seen as benefiting from increased defense spending in Germany and Europe, prompting hedge funds to remain net long on these stocks.
Hedge funds continued to show a preference for German companies, remaining net long on them while being net short on companies based in other European countries. This shift reflected the market’s increasing uncertainty due to trade tensions and the broader economic outlook for Europe.
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