Here’s Why Institutional Investors Are Shorting European Stocks

Crude oil surged – then plunged – as ceasefire announced

This Easter weekend was an all-action, high drama one – from the dramatic rescue of the fallen US pilot behind enemy lines, to the last-minute ceasefire deal (Tuesday, 20:00 EDT), to the fast approaching global energy crisis.

Despite these chaotic events, financial markets were relatively calm when trading resumed on 6/7 April. Most investors adopt a ‘wait-and-see’ stance. Who can blame them? Untangling the growing geopolitical mess is complicated enough, let alone trying to fit a suitable trading strategy to a highly erratic environment. Even many top-notch hedge funds like Caxton were wrong-footed by fast-moving events in March.

For the third consecutive week, I’m highlighting the world’s ‘most important chart’ right now: Crude oil.

Since my last Macro update, crude oil prices made another leap, before plunging on Wednesday on the ceasefire announcement. $120 is the razor-thin resistance in crude’s bull run. Underpinning oil’s rally is, of course, was the closure of the Strait of Hormuz.

Seemingly, the more threats President Trump throw at Iran, the higher oil prices go. Despite the recently announced 2-week conditional ceasefire, the Iranian government is steadfastly claiming control of the Strait, even after losing a whole cohort of its senior officials. The final negotiation position of both sides remain far apart. 

High energy prices are undermining the global economy

As for the UK, the energy crisis is hitting home.

The last jet fuel tanker from the Gulf had arrived in Britain, with no more supply on the horizon for the foreseeable future.

Jet fuel prices are skyrocketing to all-time highs. IATA shows that jet fuel is more expensive now than during 2022 (see below). “UK flights are not yet being cancelled at scale,” observed a reporter from the Supply Chain magazine, “but the risk window is narrowing.”

Source: IATA.org 

Meanwhile, forecourt diesel prices have shot up significantly. RAC diesel price tracker shows the fuel to be approaching the 180p barrier (see below). Consumers are clearly feeling the pinch.

As a reminder, transport is the lifeblood of modern economies. When transport costs surge, it lifts the price of movements of goods and people. Inflation rates are about to hit key gauges. Soon, the Bank of England will feel the pressure to raise the policy Base Rate.

Unless the supply situation improves substantially in the near term, UK – and Europe – is heading into an energy crunch situation with severe economic fallout.

Source: RAC (April)

While equity indices are steady, bears are quietly positioning

 Given the tumultuous macro backdrop, many benchmark equity indices have remained surprisingly steady in the past few weeks.

The UK FTSE 100 Index remains above the psychological 10,000; while the German DAX Index is above correction territory (9% below all-time highs, see below). Why, you wonder, are key stock indices not at lower levels?

Supporting this steadiness is the hope-based TACO. Many investors are still assuming that Trump will delay the threats to ‘obliterate’ Iranian facilities, leading to a peaceful deal to re-open the Strait. The current White House is famous for making last-minute policy amendments.

Indeed, the latest conditional ceasefire agreement was only announced minutes to the self-imposed Trump deadline.

Astute investors are realising this ‘disconnect’ between the dire energy supply situation on the ground and buoyant asset prices, and are taking advantage of the gap.

A gentle reminder to readers that Europe, unlike US, is a net energy importer. Higher energy prices will therefore hit the continent harder economically than the US.

An interesting figure published in Financial Times this week confirms this trend. Institutional investors are piling in on the short side, shorting European equities while prices are still relatively high.  

Source: Financial Times (paywall)

Wizz Air (ticker:WIZZ) has vaulted to be the most shorted stock in Europe. Easy to see why – its share price is languishing at new all-time lows. With jet fuel rocketing and travel demand about to plunge, shorters are betting further downside momentum here. Yes, prices did jump 14% higher on Wednesday, but its chart is long-term bearish.

Easyjet (EZJ) is another vulnerable travel stock; prices are slipping to 3-year lows.

The thing is, not every airline stock looks so dire. International Consolidated Airlines (IAG), for example, remains on a medium-term uptrend; as is Ryanair Holdings (RYAAF).

And a few other sectors are doing ok during this conflict, such as oil, fertilisers and battery companies. The latter was covered in last week’s Macro. 

Many companies are still projected to be profitable in 2026. There is no widespread hit to corporate earnings (yet).

 

Should we start dumping stocks?

The above analysis begs the questions: Should we start bailing out of the market given the looming energy crunch?

On one side, it appears there is growing chasm between the still-lofty stock prices and deteriorating events on the ground. If the ceasefire agreement fails to hold, elevated energy prices will eventually hike household, corporate and government expenditures sharply. Interest rate will rise steeply, too, hitting leveraged entities. In this scenario, many stocks will slump as profit margins contract, debt costs soar and revenue decline. 

On the other hand, given the severe downside risk Trump may be encouraged to ‘declare victory and get out’ of the conflict completely. This will bring widespread relief to the market. The only problem here is that it requires Trump to ‘negotiate’ with Iran instead of calling for ‘unconditional surrender’. It takes two committed parties to bring lasting peace in the region.

In sum, the financial market is sitting at a critical juncture right now. Jittery, yet hopeful. Many companies are extremely vulnerable to pricey energy costs and there is a case for shorting these stocks.

But whether this bearish take should be applied discriminately to all stocks depends on one’s outlook of the economy. Yes, there is now a conditional agreement at hand, but we’re only a few missile away from crushing that fragile truce. The ‘smart money’ is already taking side. We may soon need to do so too.