European Stocks Erase Loss as Short Covering Slows, Travel Jumps

European equities erased deep losses to close little changed, as airlines rallied and as some of the region’s most heavily shorted stocks halted the gains driven by retail traders.

The Stoxx Europe 600 Index rose 0.1% in London, wiping out an earlier slide of as much as 2.1%. Deutsche Lufthansa AG and British Airways parent IAG SA climbed after American Airlines Group Inc.’s revenue beat forecasts and as U.S. carriers were caught in the lingering rally for some shorted stocks. EasyJet Plc also rose, reversing an earlier drop following disappointing results.

Europe’s Short-Covering Rush Loses Steam After Two-Day Rally

Investors are watching developments in the U.S. retail buying frenzy kicked off by GameStop Corp., the impact of which has spilled over into European markets, stoking volatility among some heavily-shorted stocks. Poland’s CD Projekt SA jumped 16% to lead the Stoxx 600 after Elon Musk tweeted that “the esthetics of Cyberpunk are incredible.” In the meantime, GameStop’s surge came to a halt after online trading platforms like Robinhood Markets prevented clients from buying its shares.

Earnings are also fueling moves in single stocks, while investors weigh concerns over Covid-19 restrictions after a rally fueled by vaccine bets sent the Stoxx 600 to an almost 11-month high on Jan. 14.

European Stocks Erase Loss as Short Covering Slows, Travel Jumps

“The universe of short-squeeze vulnerable names is probably not large enough to cause systemic risk,” said Madison Faller, global investment strategist at JPMorgan Private Bank. “It does emphasize that market structure is going to continue to cause equity market volatility.”

While airlines rallied, many of the favorites among the most-shorted names declined. Property stocks Unibail-Rodamco-Westfield and Klepierre SA slipped 1.5% and 4.2%, respectively, while education publisher Pearson Plc tumbled 7.8%.

Reddit-Fueled Rally Spurs Short Covering in Europe: Taking Stock

Some of last year’s top-performing stocks, considered beneficiaries of lockdowns and efforts to contain the Covid-19 pandemic, also slumped. Meal-kit delivery company Hellofresh SE fell 3.4% and Delivery Hero SE lost 1.2%.

In gloomy macro news, economic confidence in the euro area fell in January, after governments extended restrictions to contain the spread of the coronavirus and vaccination campaigns got off to a slow start.

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