Hedge funds drop European stocks for US and Japan, analysts say

By Nell Mackenzie

LONDON (Reuters) – Hedge funds ditched European equities last week for stocks in the United States and Japan, client notes from JP Morgan, Morgan Stanley (NYSE:) and Goldman Sachs (NYSE:) show, as strong economic data lifted equity markets in both countries.

Commodity Trading Advisors, hedge funds that use algorithms to trade market trends, rotated out of European and Hong Kong stocks and have moved into the United States and Japan, a JP Morgan note seen on Monday showed.

These funds have taken the largest bullish position in Japanese stocks seen in about two years, while long, or bullish bets, on UK stocks were “trimmed the most in May,” the note said.

A strong U.S. jobs report and relief that a U.S. debt ceiling crisis had been averted propelled the to its highest since last August on Friday, while investors are betting the Bank of Japan would retain its ultra-loose policy, pushing the to a 33-year high in its biggest daily gain since Jan. 18 on Monday.

Hedge funds’ net buying in North American stocks reached the highest level Goldman Sachs had seen in about five months, led by investments in information technology, consumer staples and health care, a Goldman Sachs note to clients said.

Net selling in U.S. energy stocks hit 10-week highs and neared the highest levels since 2018, its note added.

Hedge funds also bought shares of North American financial companies, health care, industrials and consumer-related sectors, a Morgan Stanley note said.   A separate Morgan Stanley note on Monday said markets were now in the midst of several “hotter but shorter”, earnings cycles. An earnings recession this year is likely but not yet priced by markets, the note also said.