European and U.S. travel, leisure and bank stocks saw a rally leading to a loss of billions of dollars on Monday, by short-sellers who had bet against them.
The rally was as a result of news that a COVID-19 vaccine is on the way. The hospitality industry has seen major setbacks due to travel related restrictions, lockdowns, and safe distancing norms being imposed worldwide.
Investors positioned to profit from declines in European travel, leisure and bank stocks alone lost more than $500 million on Monday, as per reports of data provider ORTEX Analytics.
Among U.S. shares, just seven travel-linked companies, Carnival Corp CCL.N, Expedia Group EXPE.O, Booking holdings Inc BKNG.O, Royal Caribbean Group RCL.N, American Airlines Group AAL.N Wynn Resorts WYNN.O and Norwegian Cruise Line Holdings NCLH.O, accounted for $2.35 billion in losses for short-sellers.
Total short-selling losses across industries are likely to have been much higher
European travel and leisure stocks.SXTP is up 12% since the start of the month while shares of banks.SX7P, which is sensitive to the state of the economy and among the markets’ worst performers since the COVID 19 outbreak in March, reached a five-month high on Tuesday.
The Dow Jones U.S. Travel & Leisure Index.DJUSCJ jumped 8.2% on Monday and is up nearly 15% for November. On Tuesday, the index fell 1.7%.
The triggering factor in the rally of the beaten-up shares was due to Pfizer’s announcement that its vaccine trials have yielded positive results.
Calculations by ORTEX Analytics showed short sellers of European travel and leisure companies lost $284 million based on positions held on Monday. Losses for European bank short-sellers totaled $233 million
Rolls-Royce RR.L, Carnival CCL.L, and British Airways owner IAG ICAG.L rank among the biggest winners of this week’s rally, while bank stock risers include Societe Generale SOGN.PA, Barclays BARC.L, and Lloyds LLOY.L, all up between 10% and 25%.
But for short-sellers the rebound equaled pain after several months of profitable bets — they lost an estimated $101 million on Deutsche Lufthansa LHAG.DE on Monday, $52 million on TUI TUIGn.DE, and $66 million on HSBC, ORTEX data showed.
ORTEX co-founder Peter Hillerberg was quoted as “Whilst Pfizer described yesterday as a great day for science and for humanity, it was anything but for short sellers who look to have been caught out by the market adjustment.”
Shorting stocks is a way to profit from falling stock prices. A fundamental problem with short selling is the potential for unlimited losses. Shorting is typically done using margin and these margin loans come with interest charges, which you have pay for as long as the position is in place.Hedge funds profit when they borrow a stock and sell it back when the price falls, pocketing the difference.
Funds with significant short positions in travel and leisure stocks include D.E. Shaw, GLG Partners – which had a net short position in Rolls-Royce of 0.92% on Nov. 4 – and Marshall Wace, according to UK regulatory filings.
The funds either declined to comment or did not respond to requests for comment.
Betting against travel and bank stocks had been a winner for hedge funds since governments imposed complete shutdowns for the fear of coronavirus community spread leading to complete economic standstill since March.
Short sellers had made an estimated $1.87 billion from bank shorts from March to Nov. 6 and $140 million from wagering against travel and leisure companies, ORTEX notifies.
“Companies whose business models have been most impaired by COVID are yet to fully recover from their lows.They could therefore be the biggest beneficiaries of a successful vaccine deployment, as their depressed revenue and earnings are yet to recover,” analysts at Barclays said in a note on Tuesday.
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