The Struggle of Long/Short Funds, and the Return of Meme Stocks
Author: Marco Santanche
Gloomy Europe
The situation in Europe is uncertain, with the BoE expected to hike rates again on Thursday. Regardless of the drop in inflation, the UK's major financial institution looks set to bring in a new 15-year-high interest rate, with economic growth looking set to be relatively flat in the upcoming months, if not negative. Moreover, higher borrowing costs have reduced consumer and business spending and confidence. According to Victoria Scholar, head of investment at Interactive Investor, a 25bps or 50bps hike would be more about "signaling how concerned the central bank is about inflation and growth."
On the continental side, German exports stagnated in June, with a smaller-than-expected rise of 0.1% over the previous month, while imports slumped 3.4% on the month. However, the consumer price index for the euro area rose by 5.3%, down from a 5.5% rise in June. The expectation for growth in Q3 and Q4 2023 remains low, regardless of the expectation from the markets that ECB President Christine Lagarde will take a break from hiking rates.
Long/short equity funds look set to post losses
Long/short funds are on track to post the worst month of performance since May 2022, relative to excess returns to their benchmarks. Being forced to unwind their short bets in July, both JPMorgan and Morgan Stanley data show de-grossing of positions from this segment of their institutional clients. Most of the year has been depicted as bearish, with low expectations for equity markets' recovery and the conviction that inflation will remain sticky throughout the year. But the markets rallied, driven by the technology sector (one of the worst performers in 2022). And now, retail investors and option traders are back to play on the upside of meme stocks and volatility as well.
Meme stocks are back
The latest news on a group of suffering companies is reminiscent of the meme stocks frenzy of a few years ago. Tupperware (TUP +347.56% over the past month) and Yellow Corp (YELL +242.21% over the past month) have rallied, fueled by retail investors, regardless of their bankruptcy filings. However, some experts do not pair them with meme stocks, and believe the rally is due to the unwinding of short positions. Truth is always in the middle, and both factors might have moved the stocks so wildly. However, at the moment, the risk is extremely huge and might bring investors considerable losses if they wanted to join the party right now.
Trading strategy is based on the author's views and analysis as of the date of first publication. From time to time the author's views may change due to new information or evolving market conditions. Any major updates to the author's views will be published separately in the author's weekly commentary or a new deep dive.
This content is for educational purposes only and is NOT financial advice. Before acting on any information you must consult with your financial advisor.